Barron's on AOL: All Talk, No News
America Online's stock price dropped more than six points yesterday. In
itself, this is of course hardly stop-the-presses news. In fact, given the
volatility of Internet stocks, it's more like the proverbial dog-bites-man
story. But the drop in AOL's price was noteworthy because it seems to have been
provoked almost entirely by a negative item on the company that appeared in
Barron's over the weekend.
The item was the centerpiece of the weekly column by Alan Abelson, as
bearish a commentator on Wall Street as exists today and a man who bears a
special enmity toward Internet stocks, all of which--as far as I can tell--he
thinks are grossly overvalued. In essence, Abelson gave a short-seller with a
significant short position in AOL--meaning that he's betting that the company's
stock price will drop--the opportunity to blast the company and explain why
AOL's future is so bleak.
Now, there's nothing wrong with quoting short-sellers on companies, even
when they stand to make a great deal of money if their comments knock those
companies' stock prices down. Short sellers are often founts of useful
information, and a certain kind of institutionalized skepticism seems to make
them adept at sniffing out fraud and deception, particularly in corporate
accounting. Certainly the financial press is full of more than enough fund
managers touting the stocks they love for there to be plenty of room for
short-sellers attacking the stocks they hate.
What was striking about the attack on AOL, though, was just how obvious and
devoid of new information it was. We were informed that AOL's subscriber growth
was slowing, that the company was facing increased competition and that the
advent of free Internet services, especially abroad, would hurt it. We were
also told that AOL was already suffering, and would suffer more in the future,
from price cuts on the part of its American competitors, and that soon the
company would have to rescind the price hike it was able to push through last
year.
The last point is, of course, pure speculation, and it rests on two
fundamental misconceptions. The first is the idea that AOL is just like any
other Internet service provider. It's not, because even though it's
considerably more integrated with the Internet than ever before, its
proprietary services--including above all its chat rooms--continue to attract
and keep consumers. There's no evidence that AOL users are price-sensitive. The
second misconception is the idea that Net users are willing to abandon their
e-mail addresses to save a few bucks. This is just wrong. E-mail is the killer
app of the Internet, and it is a true source of customer stickiness. It may be
easier to change your e-mail address than your street address, but for a lot of
us, we'd probably have to tell more people about the former than the
latter.
In any case, whether Abelson was right or wrong is not really as interesting
as the fact that despite the familiarity of his critique, it was able to drive
down AOL's stock price by almost 7 percent in a single day. No AOL investor who
read that piece could have come away from it thinking, "Damn. I was just wrong
about the business. I need to sell." In other words, there was no new
information in the story that needed to be incorporated into the stock
price.
Except, of course, that the existence of the story itself was information
about AOL. It's not that what was in Abelson's column drove the stock down. The
fact of Abelson's column hurt AOL, because investors assumed that the fact of
Abelson's column would hurt AOL.
The real question is whether, in incorporating the reality of Abelson's
column so quickly, the stock market was efficient or inefficient.
Unfortunately, this is almost a metaphysical question. An efficient market is
one that assimilates everything meaningful that can be known about a company
into that company's stock price. In the long run, Abelson's critique of AOL is
meaning less . But in the financial-news-saturated and twitchy market we
live in, in the short run a piece blasting a stock is almost sure to move that
stock, which would seem to make it meaningful. And so the snake ends up eating
its own tail.
Illustration on Slate's Table of Contents by Mark Alan
Stamaty.
