Novice Investing - Is Earthlink The Weakest Link?

Date: Monday 01st 2008f December 2008 05:23:22 PM

Is Earthlink The Weakest Link? - 10/20/2005

By: Novice Investing Staff

On Thursday, Earthlink Inc. (ELNK) reported earnings of $ 0.27 per share for the third quarter of 2005. The latest earning report shows that Earthlink lost 193,000 dial-up customers. It ended the quarter with 2.51 million customers, about 1.5 million of it is broadband customers.

With all the talk about buying up AOL, has anybody looked at Earthlink recently for possible acquisition? Currently, ELNK has $ 390 M of net cash and its market cap is $ 1. 37 Billion. Therefore, the real price of Earthlink's business is $ 1.0 Billion. For $ 1.0 Billion, potential buyers will get the chance to convert all 2.51 million customers into broadband connection. Why don't Verizon or Comcast of the world take a look at Earthlink?

First of all, let's calculate potential revenue gain for acquirer. 1.5 million of Earthlink's customer is already in the broadband connection. Therefore, it is easier to convince them to switch. The other 1 million might be a little harder to switch. Therefore, let's assume that potential acquirer can convince 50% of the dial-up customers to switch to broadband. This brings potential broadband customers to 2 million even. Assuming a broadband price of $ 30 per month, potential acquirer will get $ 60 M monthly revenue or $ 720 M in annual revenue. Add in $ 65 M in advertising revenue, total potential revenue will go up to $ 785 M.

In our exercise with AOL, we assign a 2x revenue multiple for the value of AOL's business. Earthlink is a smaller player and thus it deserve lower multiple. Assuming a 1.5 x revenue multiple, the price tag for Earthlink is $ 1.18 Billion. This is an 18% premium over today's closing price.

Again, what we are doing here is just speculation. If Earthlink do get acquired, we will update it and compare that with our suspected price tag for Earthlink's business.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Earthlnk Inc. (ELNK) or any other securities.

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