AOL (NYSE:AOL) recently announced its Q4 2010 earnings, in which it cited optimism surrounding the potential to grow its display advertising business through Patch.com. [1] Patch is a website acquired by AOL in June 2009 that is aimed at providing local news. [2] A heightened focus on local news is nothing new, as companies like Yahoo (NASDAQ:YHOO), Google (NASDAQ:GOOG) and Facebook also serve local content to capture a share of the potentially $16 billion market in 2011. [3]
A few weeks back, we covered a story on efforts by Yahoo and other competitors to enter the local news arena (see Yahoo Enters the Local Marketing Arena).
We currently maintain a $23.94 price estimate for AOL stock, which is about 10% higher than market price.
See our full analysis and $23.94 price estimate for AOL
Patch.com Attracting More Users
AOL commented that the company expanded Patch into 555 new towns in Q4 2010, and ended the year at 775 towns. [4] Patch.com attracted around 3 million unique visitors during December 2010, which is about 80 times the number recorded a year earlier. [5]
Overall, unique visitors on AOL’s site has hovered around 120 million over the past few years, and we expect this trend to continue going forward. [6]
Although the success of Patch.com has helped AOL attract more visitors, the company has incurred higher expenses (to the tune of $75 million in 2010 on Patch alone) without Patch contributing much to the top line. [7] AOL’s display advertising gross profit margins has been on the decline, dropping from 51% in 2008 to around 48% to 2010. We anticipate further declines towards 40% by the end of our forecast period.
AOL does expect Patch to contribute to the company’s profitability in 2011, however. [7] Over the long-term, Patch’s potential to help AOL accelerate unique visitor growth and increase profitability could lift the company’s stock value.
A scenario in which the number of AOL unique visitors increases to 150 million and gross margin remains steady at around 48% throughout our forecast period (vs. our base case projection of 122 million and a decline to 40%) would imply an upside of 16% to our $23.94 price estimate.
Notes:- AOL Q4 2010 earnings conference call transcript, February 2011 [↩]
- AOL press release, June 2009 [↩]
- New York Times citing Borrell Associates, a market research firm, as the source, January 2011 [↩]
- AOL Q4 2010 earnings conference call transcript, February 2011, Page 2 [↩]
- New York Times article citing Comscore as the source, January 2011 [↩]
- Estimated based on the qualitative analysis provided by the management during the conference call [↩]
- AOL Q4 2010 earnings conference call transcript, February 2011, Page 6 [↩] [↩]
