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AOL, Inc. (AOL): Is This the Best Internet Turnaround Play?

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AOL, Inc. (NYSE:AOL)AOL, Inc. (NYSE:AOL) has rewarded its shareholders handsomely over the past several years, and it seems as though quality leadership might lead to stock appreciation in the future. While there are definitely some bright spots, some concerning factors are being overlooked by investors.

The good news

CEO Tim Armstrong has done a good job turning around the company. He understands industry trends and plans accordingly. He also believes that the Internet will go from being primarily a search and find vehicle to a programming vehicle. If he’s accurate, then AOL, Inc. (NYSE:AOL) will be well positioned for future trends.

AOL has also made some key acquisitions over the past several years, including the Huffington Post. Other AOL online properties include StyleList, TechCrunch, Patch, MapQuest, Moviefone, and Games.com.

In addition to investing in future industry trends, AOL continues to buy back shares. The board recently approved a $150 million buyback, which will be implemented over the next 12 months based on market conditions. AOL, Inc. (NYSE:AOL) does have a strong history of buying back shares at the right times.

Another potential positive is that Citigroup recently initiated a Buy rating on the stock.

The bad news

While there has been much excitement surrounding AOL, Inc. (NYSE:AOL) as of late, revenue has still declined over the past four years. This hasn’t affected the stock price because earnings have significantly improved. However, long-term stock appreciation isn’t possible without top-line growth.

You might think AOL is likely to see top-line growth based on being ahead of the curve for online trends, and there’s a good chance that you’re correct. However, it should be noted that one trend is concerning, which is an aging user base.

As mentioned above, AOL, Inc. (NYSE:AOL) owns several internet properties. Unfortunately, in most cases, the leading age demographic that visits these sites is over 55 years old. For example, according to Alexa.com, the most over-represented age groups for the following sites are as follows:

AOL.com: 65+

HuffingtonPost.com: 55-64

StyleList.com: 55-64

TechCrunch.com: 25-34

MapQuest.com: 55-64

Moviefone.com: 55-64

Games.com: 18-24 and 65+ (tie)

This presents a problem. Unless AOL executes some highly effective marketing, its user base will age and it will lose visitors. Of course, AOL is making moves that will cater to the younger age demographic, but to this point in time, AOL’s approach hasn’t been effective in that regard.

Another concern is a decline in global market share for digital ad revenue. Below are some important numbers (courtesy of emarketer.com):

2012 Market Share 2013 Market Share
Google 31.46% 33.24%
Facebook 4.11% 5.04%
Yahoo 3.37% 3.10%
Microsoft 1.63% 1.78%
IAC 1.39% 1.47%
AOL 1.02% 0.95%

AOL versus peers

Despite revenue declines, AOL, Inc. (NYSE:AOL) is a highly efficient company with strong margins, which is often a sign of quality management. Another sign of quality management is the company’s debt-to-equity ratio of just 0.05. Therefore, debt won’t impede growth potential.

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