Look Beyond the High-Tech Accounting To Measure America Online's Market Risk
When it comes to technology companies, the stock marketÛªs current mania, itÛªs hard to top America Online Inc. Technology stocks are hot, up about 50 percent on average this year, but AOL is positively scalding, up about 135 percent. In fact, AOLÛªs stock has soared more than 2,000 percent from its initial public offering, in 1992. The Vienna-based company has 35 times the customers and 20 times the revenue it had five years ago. ItÛªs the nation's biggest on-line company and is building a recognized brand.</br></br>But look closely and you see that AOL is as much about accounting technology as it is about computer technology. So make sure you understand the</br></br>Accounting is terribly important to AOL. The better its numbers look, the more Wall Street loves it and the easier AOL can sell new shares to raise cash to pay its bills. By my analysis, the company is running a cash deficit of about $75 million a yearÛÓa deficit it covers with money from stock sales. Thus, if AOL canÛªt sell stock, itÛªs got big trouble. At the least, it would have to drastically scale back its expansion plans.</br></br>Lennert Leader. But the point isnÛªt that AOL violates the rulesÛÓit clearly doesnÛªt. The point is that you can satisfy the rules and still make it incredibly difficult for investors to know whatÛªs going on.</br></br>This is a particularly good time to look at AOL, because on Oct. 10 it raised about $100 million by selling new shares. AOL sold the stock even though its shares had fallen to $58.37'/2 from about $72 in September, when the sale plans were announced. Most companies would have delayed the offering, waiting for the price to snap back. AOL didnÛªt, prompting cynics to think the company really needed the money, if only because its trade accounts payable had ballooned to $85 million as of June 30 from $16 million a year earlier.