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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 Third Party sites
- Revenue Per Page View :Revenue per page view (also called revenue per impression or RPM) declined from $6 per 1,000 impressions in 2008 to $3 in 2011. However, in 2012 AOL started focusing on building its real time bidding (RTB) and programmatic buying platform. As a result, RPM for third party improved to $3.6 in 2012, and $4.5 in 2013. The company acquired Adapt.tv to boost its RTB capability for online video ads in 2013. This platform can help the company to capture a bigger chunk of online video ads market in the future.
Going ahead, we expect RPM to improve to $6 by the end of our forecast period due to better management of unused ad inventory and sales to advertisers through the increasing use of RTB. However, there could be an upside of 5% to our estimate for AOL stock if RPM increases at a faster rate to reach $7 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 were to decline to $4 per 1,000 impressions by the end of Trefis forecast period.
Display Ads on AOL sites
- Average Monthly Unique Visitors on AOL sites: AOL's unique visitors for its core sights declined from 123 million in 2008 to 111 million in 2012. The primary reason for this decline was sale of some of its business divisions like Bebo and ICQ in 2010. Secondly, the company reduced its operations in a few European countries, especially France and Germany, to rein in costs. However, since then the company has undertaken numerous steps such as acquisition of StudioNow, TechCrunch, 5Min Media, Thing Labs, Pictela and Huffington Post to stem the decline in its user base. Furthermore, the compnay continues to focus on developing original content for its properties to improve user engagement. As a result of these efforts, its unique user count improved to 116 million in 2013. While we expect average monthly unique visitors to increase to around 129 million by the end of the Trefis forecast period due to improvement in user engagement, AOL will have to search for new ways to drive traffic to its websites. 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. However, AOL's initiatives such as "Project Devil", which reduces visual clutter on web pages and enhance ad space functionality in order to draw higher user engagements levels, helped in stemming this decline. Furthermore, we estimate that a steady improvement in premium video content across its websites has helped the company to steady its RPM. As a result, RPM improved to $3.03 in 2013. We expect AOL's RPM levels to improve to around $3.5 per 1,000 impressions by the end of Trefis forecast period due to availability of premium content across its websites and improvement in user experience through a cluter free ad interface. 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 0.30% in 2013, 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, signed in 2010, 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 on third party business is the most important component of AOL's value due to AOL's capability in the display RTB vertical, which is expected to reach $8.7 billion by 2017. We estimate that AOL's gross margins for its display (Both on its own sites and third party sites) and search businesses are comparable making the ad volume the primary distinguishing factor for the display ads 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 as it is able to provide quality content and sell more ads through RTB. As a result, display ads on third party website has become the most important component of AOL's value.
We estimate that the 194 million visitors to AOL ad network, which includes third party websites and its own websites, generate about 145 page views per visitor each month or a total of nearly 28 billion page views on AOL's sites and sites of its affiliates each month. We believe that AOL's page views for display ads is 10x bigger than the number of searches on AOL for which it can show search ads.
The 10x differential between search and display ad page views is offset by the higher search ad pricing which we estimate to be about $50 per 1,000 searches compared to the $4.5 that we estimate AOL earns from display ads for every 1,000 page views.
RTB is picking up steam
AOL has adopted a barbell sales strategy that offers programmatic advertising on one end and deep marketing services or premium buys on the other. It is ramping up its real-time bidding platform (RTB) through in-house development and acquisition. Additionally, to address premium ads, AOL has launched a host of new ad formats to lure advertisers to its properties.AOL is aggressively developing its RTB platform as well. We believe that RTB will be a key growth driver for AOL as it efficiently matching impressions with relevant display ads that in turn boosts revenues. While the company acquired adapt.tv to bolster its demand side platform (DSP) for video ads, its supply side platform (SSP) ADTECH Marketplace continues to support publishers by effective management of unused ad inventory.
We think AOL is well positioned to capture a bigger chunk of RTB spending in the future by leveraging its DSP and SSP. If AOL manages to capture 10% of the expected $9 billion RTB spending in the U.S., its display ads revenue from third parties can double.
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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