AOL Needs More Visibility On Growth To Justify Its Stock Price

by Trefis Team
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AOL (NYSE:AOL) is expected to announce its earnings for Q3 2012 on November 6. While it started out as a big player in the dial-up Internet space, it has been forced to transition into a company reliant on content and ads to drive revenues. During the third quarter, AOL continued to focus on its content and ads strategy by reworking the user interface for its email client and social network, and launched an online news network dubbed HuffPost Live.

During this quarter’s earnings announcement, we will watch for improvements in AOL’s display ads business, specifically for metrics like unique visitors and page views per unique visitor across AOL properties. In addition, we also want to know how management plans to navigate a competitive tech landscape without a solid social network.

See our complete analysis of AOL here

Q2 Highlights

For a business which seems to be in a constant decline, AOL posted relatively encouraging results during the second quarter. The company announced its lowest year-over-year revenue decline in seven years as revenues fell 2%. International display ad revenues grew 21% but only made up around 5% of total ad revenues. The company’s subscription revenues, a division which makes up around 6% of its total value, declined 13% year-over-year.

Redesigns in Hope of Increasing User Engagement

During the third quarter, AOL implemented re-designs to its email platform as well as its social network Patch. Both of these changes were an effort to engage users and provide a more streamlined user experience. During the earnings conference call, we will closely watch for metrics pertaining to whether or not these initiatives succeeded in engaging current users and attracting new ones.

If these initiatives succeeded, we expect them to directly impact AOL’s display ads division, which according to our estimate makes up around 22% of the company’s total value. For example, if AOL was successful in increasing the time spent by current users across these platforms, it would have a direct impact on the number of page views per user.

Need to See Some Progress With Patch

In our opinion, AOL needs a strong social offering which can attract new users and can drive page views with existing users. As outlined in our article, Patch’s New Look Still Leaves It Inferior To Competitors, we don’t think that Patch can be AOL’s core social offering.

Regardless, since AOL has invested heavily in Patch in hopes of making it its main social product, we would like to see some revenue and visitor growth from the site. Additionally, we will be closely tracking management’s strategy for the platform going forward and whether or not it plans to take other initiatives on the social front.

Conclusion

Since we have a $29 price estimate for AOL, which is approximately 20% below the current market price, we think AOL needs solid earnings to justify its current market valuation. We are skeptical about the growth opportunities for the company, and need to see some proactive strategies from management as they attempt to keep AOL relevant in the highly competitive tech industry.

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