Following its planned acquisition of

Time Warner

(TWX)

,

America Online

(AOL)

may one day be the world's largest media and entertainment company. But Tuesday afternoon, it was just another Net stock.

Plunging
AOL shares' Tuesday tumble

The day before AOL's scheduled release of its fiscal first-quarter financial results, the company's stock plummeted $9.30, or more than 17%, to close at $43.31. The company, which has earnings, positive cash flow and a $100 billion-plus market capitalization that make it a blue-chip Net stock, has now fallen more than 53% from its high of $93.31 last December.

Though AOL's stock held steady in September while most other Net stocks crumbled, its shares started sliding in earnest after

Yahoo!'s

(YHOO)

coolly received earnings announcement a week ago. AOL's stock has fallen more than 21% since Yahoo's announcement.

Things got really jittery Tuesday morning, after

Lehman Brothers

analyst Holly Becker issued some cautious comments about Yahoo! and the rest of the Internet sector. When Becker talks, people listen: Earlier this year, her negative comments on both Yahoo! and

Amazon.com

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(AMZN) - Get Report

sent each of the stocks south. Becker rates AOL outperform, her firm's second-highest rating, and Lehman has underwritten for AOL.

Pink Fiberglas

AOL bull

Henry Blodget, Internet analyst for

Merrill Lynch

, called the drop in AOL's stock Tuesday an overreaction to his competitor's comments.

The outlook for the fiscal first quarter, which ended Sept. 30, is, in Blodget's words, "solid though unspectacular." Attempting to address various investor concerns about the stock, Blodget wrote in a recent report that he thought investors might be concerned about AOL's possible drop in revenue per subscriber in the quarter. If that were true, Blodget said, it would be so for a good reason: AOL's adding a large number of subscribers in September -- all of whom, though, would be getting a free trial for that first month.

Fallen Giant?
AOL shares off during 2000

Moreover, Blodget acknowledged that investors are beginning to wonder how exposed the merged AOL-Time Warner would be if advertising in general -- off-line as well as online -- were to slow. "While we do not believe the company is immune," writes Blodget, "we think AOL is much more insulated than other media companies." Merrill has underwritten for AOL in the past three years.

Puzzling

While valuing AOL remains a puzzle -- just as it has been for all Internet companies, and just as it would be for any company about to embark on the biggest merger in history -- AOL is better-protected than most companies looking for revenue and earnings growth from a consumer Internet business. Less than 30% of its revenue last year came from advertising and e-commerce; 64% came from monthly subscription fees, which are growing slowly but steadily.

For the first quarter, AOL is expected to report per-share earnings of 13 cents, according to analysts surveyed by

First Call

, up from 8 cents a year ago. The expectation for quarterly revenue is roughly $2 billion. Analysts are saying about $640 million of that will be from what AOL calls "advertising, e-commerce and other" -- mostly the money that AOL makes from advertisers, merchants and its own merchandise sales. This segment is AOL's fastest-growing unit, but because of seasonal weakness, analysts like Blodget and Frederick Moran of

Jefferies

are expecting relatively modest 5% sequential growth.

Though the advertising and commerce revenue may be seasonably weak, Blodget isn't alone in thinking that the shakeout of smaller dot-com advertisers won't meaningfully hurt AOL. In fact, Moran writes in a recent note, along with reacceleration of subscriber growth in the second quarter ending Dec. 31, he expects advertising and e-commerce revenue "to pick up nicely due to the holiday shopping season and the beginning of synergies from the AOL-Time Warner combination."

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