There are a lot of reasons why the stock of America Online Inc. has been going down lately, the most intriguing -- if not important -- being Chairman Steve Case's decision to buy himself a pineapple plantation.
In the grand tradition of media barons who long for a little place in the country, Case sold about $150 million of his AOL stock last week and plans to spend $40 million on 28,000 acres of Maui.
Wow-wee. That sounds like a lot of land, but Case's penchant for pineapple bears little resemblance to the extravagance of the ersatz Xanadu built by William Randolph Hearst at San Simeon. It's more like Ted Turner's purchase of hundreds of thousands of acres of South American rain forest as an ecological enclave.
Case, who grew up in Hawaii, wants to preserve a piece of his childhood. He aims to buy control of Maui Land & Pineapple Co., which owns the Kapalua resort and real estate development, a shopping center and one of the island's last big tracts of agricultural land.
Maui Land & Pineapple is a public company with shares that trade on the American Stock Exchange. Under a state takeover law, shareholders must approve Case's purchase of a controlling stake in the company. The stake is owned by a group lead by Maryland's largest charitable organization, the $1.2 billion Harry & Jeanette Weinberg Foundation Inc.
The late "Honolulu Harry" was downtown Baltimore's biggest landlord before he became its biggest benefactor. The Weinberg foundation wants to cash out its holdings in Maui, which could force sale of the property. Case's investment would keep the parcel intact.
What's all this have to do with the price of AOL stock?
Well, the stock dropped $7 a share last Monday after Case and other AOL insiders sold a block of 4 million shares for a little more than $100 a share. The market for AOL stock has been anemic for weeks and it was too weak to absorb such a big sale without some impact.
AOL officials say the insider sales were routine -- a non-event. Even if the sales had only a one-day impact on the stock price, however, they did send a signal: Insiders wanted to sell badly enough, even though the stock had lost 40 percent of its value since April, when it hit $167.50 a share. It's hard to imagine they would have sold for $100 a share if they thought the stock was going back to $167.50 any time soon. The stock closed Friday at $97.121/2 a share, down $1.621/2.
But many analysts who follow AOL stock do think it is going back from whence it came. Along with Amazon.com Inc., they regard AOL as an Internet blue chip. The stock, which is rated as a "buy" by 95 percent of the analysts who follow the company, has fallen less than most of its Internet peers.
But the 40 percent plunge in AOL stock and the broader sector decline suggest some of the air has gone out of the Internet stock bubble.
Even analysts who expect AOL to return to the range of $160 to $200 caution that it may not happen this month. August has become the cruelest month for technology stocks, which for the past three summers have shown a tendency to wilt in the heat. One theory is that traders don't want to take the risk of tech stocks tanking while they're vacationing in the Hamptons, so they get out of the market for the summer. With buyers at the beach, the stocks swoon.
August aside, analysts have not lost their love for AOL, but have started dropping little tidbits into their reports, citing issues that could be responsible for the stock's fall, or could limit its rebound.
The broad decline in Internet stocks is blamed by some analysts for what has happened to AOL. It now is almost the conventional wisdom that Internet stocks are a speculative bubble. Net stock analysts don't agree, but at last month's Internet Summit in California, a majority of the Net execs told pollsters they think there is a bubble.
Bubbles don't deflate automatically when they are spotted. You could see empty office buildings in the 1980s long before the real estate bubble burst. Only when people started missing their mortgage payments did building values collapse.
Internet companies aren't missing any mortgage payments. Nor are they missing their quarterly numbers. But after Yahoo Inc., Amazon.com and AOL released results for the quarter that ended June 30, all showing big gains in revenue, World Wide Web page views and other measures, all their stocks declined in value.
David Simons, managing director of the New York-based research firm Digital Video Investments, points out that when you look at the quarter-to-quarter growth rates, all three companies are slowing down. AOL's revenue for the first three months of 1999 was up 15 percent from the same period a year ago, while in the second quarter revenue grew only 9 percent.
The "law of large numbers" is kicking in. It's easier to grow to $2 million in revenue from $1 million than to grow to $2 billion from $1 billion, though the percentage increase is the same.
Percentages aren't what are important, as far as AOL is concerned. AOL is adding 5 million members a year. No other Internet service provider even has 5 million members. AOL is generating $1 billion a year in electronic commerce revenue -- nobody else comes close. With operating income of $226 million for the second quarter that ended June 30, AOL is looking to earn $1 billion this year. That's not net income because it excludes some charges, but hardly anybody else in Internet-related services makes money no matter how the books are kept.
Growth usually means higher profit margins, but Merrill Lynch & Co. analyst Henry Blodgett, one of AOL's biggest fans, says the company is facing a squeeze: The time each AOL subscriber spends online is growing faster than the cost of operating AOL's network is declining.
The average subscriber spends 53 minutes a day on AOL, up from 44 minutes a year ago. The more time spent online, the more ads AOL can flash on the computer screen -- and that's more important than the added network cost. AOL plans to spend $10 billion improving its network over the next five years, making the system faster and less expensive to run.
Speed and price are the two biggest uncertainties in AOL's future, analysts agree.
In Europe, AOL's growth is stymied by free Internet services, which make money by collecting kickbacks on the per-minute phone charges that are standard there. In the United States, some services are offering free Internet, but users must tolerate endless advertising. The real competition is from the discounters that charge $9.99 a month. AT&T Corp. is expected to offer unlimited Internet service at that price later this year, which could trigger an Internet price war.
A price war could have a big effect on AOL's revenue. AOL has its stripped-down $10-a-month CompuServe service, but collects twice that much from AOL members. AOL is confident members will pay more for its full catalogue of content and is dubious that AT&T will become a formidable competitor.
But price isn't the only issue confronting AOL. The impact of the Internet speed race, known in telecommunications jargon as "broadband," may be even more difficult to assess. Most people today log on to AOL via a conventional modem and phone line, but the future is a high-capacity, high-speed "broadband" connection. Cable and phone companies can provide high-speed Internet access; the question is whether they will let AOL use it.
There are political and regulatory reasons, along with business and economic factors, involved in determining who will own and who will use the high-capacity Internet connections. It could prove to be a make-or-break issue for AOL, which is using lobbying, lawsuits and cash to ensure that it is not frozen out.
It's hard to imagine that the Internet's most successful company will be left behind by the newest Net technology. But so much is at stake that some investors want to see some sign of how the issue plays out before they start buying AOL stock again.