AOL (NYSE: AOL), on August 27, announced that it will be issuing a special dividend of $5.15 per share to return some of the $1.1 billion in cash generated from a sale of patents to Microsoft.  Investors lapped up this news as the stock jumped after the announcement. However, in contrast to market sentiment, we think that AOL giving back all of the cash from the patent sale signals diminishing growth opportunities, an ominous sign for a struggling company.
We currently estimate that AOL’s cash reserves make up approximately 50% of the company’s value. After the $1.1 billion in cash is returned to shareholders, the company’s operating segments will be a bigger driver of its value. Since we believe that AOL’s return of cash signals limited growth opportunities, we will examine the impact that a slowdown in our forecasts will have on AOL’s value below:
Average monthly unique visitors
According to our estimates, Display Ads on AOL Sites are the company’s biggest operating segment, making up approximately 43% of the company’s value, if cash is excluded. One of the primary drivers for this segment is the Average Monthly Unique visitors on AOL sites. We currently forecast an increase in the number of unique visitors going forward, but we could see downside to our estimate as growth slows. For example, we currently forecast that the average monthly unique visitors will increase to 123 million by the end of our forecast period. However if growth remains flat at around 110 million, we would see downside to AOL’s price. (Please note that the downside would be much greater after AOL pays back the $1.1 billion in cash).
Page views per unique visitor
Another important driver in the Display Ads division is the number of Page Views per AOL unique visitor. In our opinion, this number is extremely important as it shows the company’s success at engaging users. We think that the cash from the patent sales could be better spent to innovate AOL’s product suite, which could generate growth in page views via user engagement. On the contrary, AOL’s move of returning cash from the patent sale would decrease the number of new products, consequently decreasing user engagement and page views per unique visitor.
Once a powerhouse in the internet space, AOL does not even make it to the list of top 50 sites in the world, according to Alexa.  The patent sale provided the company with an interesting opportunity to invest in new projects, which it failed to capitalize upon.
We currently have a $29 price estimate for AOL which is approximately 20% below the current market price.Notes: