With so much to distract them lately -- the oil spill, European debt and the "flash crash," to name just three -- investors may have missed a couple of recent Internet birthdays.
Yahoo (YHOO, news, msgs), founded in a trailer at Stanford University in the nascent days of the Internet, turned 15 on March 2. AOL (AOL, news, msgs) reached the ripe old age (for an Internet company) of 25 on May 24.
If they were people, both companies would be young, strong and vigorous, close to their prime. But with the fast pace of life on the Internet, these two celebrated their birthdays as tired old ghosts. They are just two of many companies that fell when the tech bubble burst in 2000 and have been mostly biding their time ever since.
Remember the promise that E-Trade Financial (ETFCD, news, msgs) was going to help you make money "out the wazoo"? Or the hot trader stock Ciena (CIEN, news, msgs), a maker of communications equipment that made -- and lost -- people bundles of money? Or EarthLink (ELNK, news, msgs), a leading Internet service provider whose shares once traded above $120? (They're around $8 now.)
The reasons vary, and they may never regain their former glory -- if it's fair to describe their pumped-up height during the bubble as "glory." But if they spring back to life, they could handsomely reward investors who put them in their portfolios now.
Here's why these five are looking lively:
1. AOL
AOL was virtually synonymous with Web surfing early on; its catchphrase "You've got mail" was big enough to inspire the title of a 1998 Tom Hanks-Meg Ryan movie. But the Web moved on, leaving AOL to haunt the Internet as a provider of outdated dial-up access.AOL has a mere 5 million subscribers now, compared with more than 25 million back in the day. Its revenue from search and display ads dropped 27% and 13%, respectively, last quarter. Overall revenue fell 23%. No wonder much of Wall Street has a "hold" rating on this ghost.
But let's look at the upside: A lot of the decline last quarter was related to necessary trimming that's part of a turnaround. This turnaround seems in capable hands, run by Tim Armstrong, the former president of the Americas division at Google (GOOG, news, msgs).
Successful turnarounds can reward investors handsomely, and Armstrong is betting his will be successful. He bought $11.1 million worth of stock in early May in the mid-$21 range, or right around current levels.
Why might AOL shuck off its ghostly status? First, AOL remains a heavily trafficked website, thanks to removing the pay wall in 2006 and letting in nonsubscribers. It has 250 million unique visitors a month globally.
The company also has a big margin of safety that gives execs some breathing room. It had $450 million in cash (and no debt) as of the first quarter. Plus it generates $100 million or so in free cash a quarter.
AOL is cutting costs, jettisoning weaker parts of its site and deploying cash from its subscription dial-up business to build content. The website will be the largest net hirer of journalists in the world next year, AOL's president of media and studios, David Eun, told Ad Age recently. It's also spending to improve technology. Both changes should boost website traffic.
Many investors worry that the risk here is that dial-up subscriptions -- AOL's cash cow -- are in a fatal tailspin. True, they fell 3% again in the first quarter. But Robert Routh, a media analyst with Wedge Partners, believes subscriptions will drop to a core group of 3 million or so who don't mind paying to keep old e-mail addresses or have dial-up as a backup.
"A straight line to zero it is not," says Routh, who has a buy rating on AOL. He may be right, given that the average subscriber has been on board for more than nine years. That's loyalty.
Besides the turnaround, Routh sees two potential catalysts on the horizon. One is a new search partnership, because its deal with Google ends in December. Given the intense search war between Microsoft (MSFT, news, msgs) and Google, a bidding war between the two would work in AOL's favor. Next, Routh doesn't rule out a takeover by Microsoft; rumors about that scenario regularly appear in the news media. (Microsoft is the publisher of MSN Money.)