Internet access and related services company; and Yahoo!, an Internet business
and consumer services organization. In short, only 5 of these 20 late-1990s lead-
ers in the Internet space survived in recognizable form over the ensuing 4-year
period. The rest had either gone out of business or been merged out of existence.
Of the ﬁve late-1990s leaders shown in Table 4.2 that survived until mid-2002,
only Amazon.com and AOL turned in positive stock price performance over the
ensuing four-plus years. Sufﬁce to say, this is not the type of stock market per-
formance foreseen by late-1990s advocates of tech stocks, especially those
closely tied to the Internet.
When measured against popular benchmarks, everyone would agree that
late-1990s valuations in this sector were at least “very high.” However, despite the
carnage in the tech sector since the 2000 market peak, some would still dispute
the notion that such valuations were crazy. To be fair, given the high degree of
uncertainty regarding the sector’s future growth prospects, it was indeed difﬁcult
to distinguish whether or not Internet valuations were crazy or just very high
during the period leading up to the 2000 market peak.
An interesting case study of extreme market expectations for Internet stocks
near the 2000 market peak is provided by a detailed valuation analysis of AOL,
then dubbed the “King of Cyberspace.”
AOL’s late-1990s market capitalization
of roughly $14.5 billion approached the combined value of all the other widely
followed cyberstars shown in Table 4.2. Near the start of the new millennium,
individual and institutional investor attention was riveted on AOL as the company
completed a much discussed merger with traditional print media powerhouse
Time-Warner, Inc. AOL was widely praised at the time for using its “inﬂated”
stock price to buy “real” businesses with meaningful revenues, earnings, and book
values. Less widely understood was why shareholders in Time-Warner would
swap their shares for such an inﬂated currency, or why other investors and stock
analysts praised the merger as a means for tapping untold synergies between the
companies. It is worth emphasizing that the ensuing discussion is based upon con-
ventional accounting data and other business information concerning AOL that
were broadly available and understood by stock market investors at the time.
VI. AOL AS A GROWTH STOCK
Investors in AOL and Microsoft Corp. enjoyed stellar stock market returns over
the 1995–99 period. Both were among the top performers in a robust stock market
environment. In evaluating the forward-looking investment potential for AOL, it
90 CHAPTER 4 A DISSERTATION ON TULIPS AND AMERICA ONLINE
For example, Netscape was merged into AOL prior to that company’s combination with Time-
Warner, Inc. While Netscape shareholders were thus able to salvage some value for their once highly
sought after shares, it is safe to say that Netscape investors fared poorly during the ensuing market rout.
For an early examination of the valuation issues surrounding AOL, see Hirschey (2001,
pp. 412–417 and 466–470).