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Investment Overview for AOL (NYSE:AOL)
Below are key drivers of AOL's value that present opportunities for upside or downside to the current Trefis price estimate for AOL:
Display Ads on AOL sites
- Average Monthly Unique Visitors on AOL sites: AOL's unique visitors surprisingly declined from 123 million in 2008 to 113 million in 2012. This decline happened as AOL sold some of the business divisions like Bebo and ICQ in 2010. Another reason for the decline was that AOL reduced its operations in a few European countries, especially France and Germany. These countries were unprofitable for AOL, and hence it decided to reduce or completely shut down its operations in those countries. However, this decline was offset by a few acquisitions that AOL did in 2010. The company acquired StudioNow, TechCrunch, 5Min Media, Thing Labs, Pictela and Huffington Post, all of which helped AOL stem the large decline in its user base. We expect average monthly unique visitors to increase to around 127 million by the end of the Trefis forecast period because we think these acquisitions will help drive up traffic for AOL. AOL has also started to provide local news content through Patch.com, which is gaining fast adoption among users. There could be an upside of 5% to the Trefis price estimate if number of unique visitors increases to 150 million by the end of Trefis forecast period. However, there could be a downside of 5% to the Trefis price estimate if number of unique visitors continue to decline to around 90 million by the end of Trefis forecast period.
- Revenue per Page View for AOL sites: AOL's RPM has declined from $4.35 per 1,000 impressions in 2007 to $3 per 1,000 impressions in 2012. This decline for AOL has happened inspite of the general revival of the economy leading to online advertising market growth. However, AOL has started to take a few initiatives in order to improve its ad pricing. For example, AOL recently launched "Project Devil" to reduce visual clutter on web pages and enhance ad space functionality in order to draw higher user engagements levels. It also acquired StudioNow, which is a video syndication website as videos often carry higher RPMs. Additionally, AOL's new partnership with Google involved sharing of AOL videos on YouTube. AOL videos should benefit from YouTube's massive reach. We expect AOL's RPM levels to improve to around $3.5 per 1,000 impressions by the end of Trefis forecast period. However, there could be an upside of 5% to our estimate for AOL stock if RPM increases at a faster rate to reach $4.5 per 1,000 impressions by the end of Trefis forecast period. Similarly, there could be a downside of around 5% to our estimate if RPM continues the historical trend of decline to reach $2.5 per 1,000 impressions by the end of Trefis forecast period.
- AOL Search Market Share: AOL's search market share has declined from around 2% in 2007 to 0.34% in 2012, and we expect it to continue to decline to around 0.1% by the end of Trefis forecast period. One of the factors for AOL's decline in this market is the steady decline of its legacy dial-up subscription business. These subscribers are the loyal AOL users and make AOL search as their home page. However, AOL has tried to revive its search business through its partnership with Google. According to the 5-year partnership, Google will provide search services to AOL in exchange for a share of the search ad revenue. Additionally, Google will also power search from smartphones and other mobile devices. There could be an upside of more than 5% to our estimate if it is able to slow down its market share declines to reach around 0.2% by the end of Trefis forecast period. Alternatively, there could be a downside of 5% to our estimate if its market share continues to decline at a faster rate by the end of Trefis forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for AOL at the top of the page.
AOL is known for its dial-up internet service which, at its peak, had more than 30 million subscribers. Since AOL's heydey in the late 1990s and early 2000s, the company has moved from becoming an internet access company to an internet content company relying on advertising for most of its revenues.
AOL generates its ad revenues through display ads (e.g. banner ads, skyscraper ads) on AOL sites like AOL News, AOL Money & Finance as well as display ads on external sites that partner with AOL. AOL's search business (AOL.com) also generates ad revenue through keyword advertising that is powered by Google.
Merger with and Spin-off from Time Warner
AOL merged with Time Warner in 2001 at the height of the dot-com bubble to form AOL Time Warner and was spun-off in December 2009. AOL was valued at roughly $175 billion in 2001 at the time of the merger and less than $3 billion in December 2009 making the merger one of the biggest value destroyers in US corporate history.
We believe that the display ad business is the most important component of AOL's value due to AOL's high display ad volume compared to its search ad volume. We estimate that AOL's gross margins for its display and search businesses are comparable making the ad volume the primary distinguishing factor for the display division's higher value.
Display Ad Volume Higher than Search Ad Volume
Although search ads are more lucrative than display ads, the display ad volume for AOL is much higher than its search ad volume making display ads the most important component of AOL's value.
We estimate that the 113 million visitors to AOL sites generate about 143 page views per visitor each month or a total of nearly 16 billion page views on AOL sites each month. We believe that AOL's page views for display ads is 20x bigger than the number of searches on AOL for which it can show search ads.
The 20x differential between search and display ad page views is offset by the higher search ad pricing which we estimate to be about $40 per 1,000 searches compared to the $3 that we estimate AOL earns from display ads for every 1,000 page views. Given that search advertising is about 14x more lucrative than display advertising, the net differential implies that the display ad businesses is slightly less than 3x as valuable as the search ad business.
Dial-up subscription business is deteriorating
AOL's subscription business offers dial-up internet access that is slower than broadband internet access offered through cable operators (Comcast, Time Warner Cable) and telcos (AT&T, Verizon). Although AOL's dial-up internet access is priced lower than broadband, consumers increasingly prefer the faster internet access speeds offered by broadband and can often purchase bundles of TV and broadband internet access that are attractively priced.
The fact that AOL's dial-up service still constitutes a significant proportion of company's value is a testimony to its earlier strength. We believe that the subscriber base erosion is irreversible and customers will continue to move away from dial-up to broadband options provided by cable operators and telcos.
Search advertising is a more lucrative field compared to display advertising
Text based search advertising leads to more targeted advertising and thus commands a higher rate compared to display advertising. Google is the the runaway industry leader in this field though Microsoft Bing has been proving to be stiff competition in the last few months.
AOL lacks a proprietary search ad technology of its own and depends entirely on Google for its search advertising business. It uses Google's algorithms and database to generate search results and gets a cut out of the revenues Google generates through searches on AOL's portal.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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