When AOL Tanked (Or Paying Attention To The Right Metrics)
Sometime between late Spring and early Fall, 1996, AOL’s stock fell from a high of $70 all the way down to $24.
These were the early days of the internet. The space was booming: startups were popping up everywhere, investors’ ears were perking up, and the big, established players were taking notice and/or beginning to get involved.
While many were excited about the opportunities, many others were skeptical. (I remember one colleague I worked with, passionately arguing that the internet was merely a channel and that it had little value beyond simple advertising. I should remind him of his comment…)
So, as you can imagine, every twist and turn in the journey of an “internet company” (such as AOL) was met with plenty of concern and consternation. For every supporter, there were plenty of detractors - “experts” predicting the company’s imminent demise.
That was the case with AOL as it’s stock price tanked that summer and the arguments were forceful. There was plenty of competition. Microsoft was entering the fray. The company was suffering technology hiccups, resulting in busy signals. And the market - driven by the experts investing in it - had spoken, driving down the company’s shares. Surely, the end was near. It was time to get out of AOL.
Only, the market - and all of the so-called experts - were wrong. AOL was far from finished. I was an active user of the service at the time and the arguments of the naysayers just didn’t make sense to me.
The company had a great product that was simple and easy to use. It was fostering a real sense of community among its users, bringing people with similar interests together from across geographies (a very new experience at the time). The company’s marketing was on point and the brand was very much top of mind (helped in no small part by the ubiquitous AOL CDs available with almost any magazine purchase at newsstands).
What’s more, one of the prime drivers of the falling stock price was the constant busy signals that users were getting as they tried to dial up (what a quaint concept) to access the service. Many interpreted this to mean that the company couldn’t keep up with its growth and that the technology obstacles would drive subscriber churn, drive down revenues and, ultimately, materially slow down growth.
But that didn’t really make sense to me. I mean, the flip side of the busy signal problem was demand that far exceeded supply. There was nothing fundamentally wrong with the product itself. In fact, it was exactly what the product offered that led to many more people trying to sign up than the company could physically/technologically cater to.
And that was an eminently solvable problem. One that would require some serious missteps to screw up. One that was simply a matter of investment and time.
And so the problem was solved. Within a couple of years, the stock was back up well over $100.
The point is, that in uncertain times, everyone’s going to have an opinion. There will be no shortage of people who have a point of view and are willing to offer up their advice. And unless you’re certain about what’s going on, we’ll take that advice at face value. Even when it’s wrong.
It helps, instead, to ask some basic questions. It helps to look at the fundamentals.
Is the underlying business sound? Is the customer still interested/paying attention? Is the company’s management focused on the right things (the customer)? Is the product still delivering tangible, differentiated value? Is the problem systemic? Is it solvable - by sheer effort or investment? Is the company taking practical steps to remediate the issue?
If the answers are positive, then you should trust your gut. Despite what the markets may be saying. Of course, there are no certain answers, so it’s important to focus on the fundamentals. Pay attention to the right measures and metrics. And move forward.