AOL (NYSE:AOL) has made its investors quite happy during 2012, as its stock has almost doubled primarily due to the sale of some of its patents to Microsoft, which netted the company $1.1 billion. In addition to this, the company has been showing some signs of a turnaround in some of its businesses as its advertising business grew 6% year-over-year for the nine months ending September 30, 2012. However, while the results for the stock and the company’s advertising business have been encouraging, total revenues actually fell 2%. Since advertising revenues will be key for AOL’s growth over the long term, we think that AOL’s unique user count and user engagement will be key for the company in 2013.
User Engagement Will Drive Page Views
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During 2012, AOL implemented re-designs to its email platform, its social network Patch, and launched a new social element to its mapping service, Mapquest Discover. In our opinion, all of these changes were made in an effort to increase user engagement across AOL properties and provide a more streamlined user experience. For the overall health of AOL’s business, we think that it is important that these changes are successful in 2013, since they can not only increase AOL’s unique visitor count, but will also increase the number of page views across AOL properties.
Both of these drivers are important because they directly impact AOL’s display ads division, which according to our estimates makes up around 28% of the company’s total value. If page views per user increases due to these changes in 2013 to around 150 and continues the uptrend over our forecast period, it would result in a 3% upside to our price estimates.
Social Element is Key
One of the key trends in the internet landscape over the past couple of years has been the introduction of the social element to a consumer’s life. In our opinion, a strong social offering is key for AOL since it will attract new users and can drive page views with existing users. However, the company has largely missed out on this trend since it does not have a substantial social network which sets it apart, but we will still need to closely watch Patch’s progress in 2013 as it is the social network that AOL has invested heavily in.
We’ve repeatedly mentioned that Patch is a relatively weak social network when compared with competitors such as Facebook (NASDAQ:FB) and Google’s (NASDAQ:GOOG) Google+, (see Patch’s New Look Still Leaves It Inferior To Competitors), but we would like to see some revenue and visitor growth from the site in 2013. Additionally, we will would like to see some new social offerings which ‘socialize’ existing AOL properties (like it did with Mapquest Discover), and preferably one which integrates all AOL services into one social portal.
AOL Still Overvalued
Our price estimate for AOL fell from $29 to $24 in early December, because the company paid out $5 special dividend to shareholders. The stock price concurrently fell by around the same amount and is trading at around $30 per share, which is approximately 25% above our current price estimate.
Overall, we aren’t sold on AOL’s turnaround just yet, primarily because it has to battle a highly competitive tech landscape to attract users and advertising dollars. Overall, in 2013 we need to see some new major strategic initiatives from management which will keep it relevant in the tech landscape.