AOL’s (NYSE:AOL) stock has had a meteoric rise this year, returning around 140% as it rose from $15 to $36. The move, in our opinion, was primarily driven by an improved perception of AOL’s business model and the patent sale to Microsoft which netted the company $1 billion. However, despite the large move in the stock, we think that the market has overshot in valuing AOL. Specifically, we think that the market forecasts faster growth than we do for three key drivers in AOL’s display ads business: revenue per page view, unique visitors, and page views per unique visitor.
Revenue Per Page View
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Revenue per page view (RPM) is an important driver in our valuation of AOL’s display ads division, which is the firm’s biggest operating segment, making up approximately 22% of the company’s value. We forecast that revenue per page view will only grow slightly from around $3.10 to $3.80 per 1000 page views in 2019, the end of our forecast period.
In our opinion, one of the primary reasons that AOL’s RPM will not grow at a faster rate is because of a relatively inferior social offering in Patch. Even though the company has invested around $160 million in the platform since its purchase in 2009, we don’t see how it can lucratively monetize a local news website. We think that Patch is not close to having the user data or user engagement of competing social networks such as Facebook (NASDQ:FB) and Google’s (NASDAQ:GOOG) Google+, and expect that advertisers will choose these competitors when spending their limited ad budgets.
Number of Unique Visitors
According to comScore’s Media Matrix report, AOL had approximately 112 million unique visitors across its properties during the month of August. This was higher than last year’s unique visitor count of around 111 million and is in line with our estimate of 112 million average monthly unique visitors for all of 2012. 
We agree with the market’s expectation of growth in the number of unique visitors, but think that they will only grow to around 120 million by the end of 2019. We are more cautious than the market in our forecasts because we think that AOL’s properties are experiencing more competition from a diverse set of internet players. For example, Huffington Post, whose unique visitor growth has been instrumental in increasing this metric across all AOL properties, is facing increasing competition from digital competitors such as the New York Times, Wall Street Journal and other news media outlets.  We don’t think that the site can maintain the rapid growth rate of 47% that it posted last year, making us cautious in our growth forecasts.
Page Views Per Unique Visitor
We forecast that page views per unique visitor will stay flat during our forecast period, at approximately 144 monthly views. We forecast no growth in this metric because AOL has lost much of its captive audience due to the struggles of AOL’s dial-up division, which has seen subscribers decline from 8 million in 2008 to around 2 million in 2011. Since AOL dial-up users are more likely to interact with AOL’s offerings such as mail and news, further declines in this user base will likely have a downward impact on the number of page views per unique visitor.
However, a factor that could provide some upside to our page views forecast is AOL’s average age of visitors; the age groups of 45-65+ are over-represented at AOL relative to the general internet population.  We think that this factor can play a part in increasing the number of page views per unique visitor, since older individuals tend to spend more time on the internet than their younger counterparts. 
We currently have a $29 price estimate for AOL, which is approximately 20% below the current market price.Notes: