Google Search Deal Could Yield Small Upside for AOL’s Stock

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AOL (NYSE:AOL) and Google (NASDAQ:GOOG) recently extended their search partnership for another five years. Under the deal, Google provides search services to AOL websites in exchange for a share of the revenue from text ads that AOL places next to search results.

The deal also incorporates mobile search and will make AOL video content available on YouTube. We think this partnership makes sense for AOL, which benefits from Google’s much larger presence in the search advertising market.  Our analysis follows below.

Mobile search

Hitherto, Google has only provided search capability to users who access AOL sites from their PCs. Under the new Google/AOL contract, Google will also power AOL search from smartphones and other mobile devices.

Last year advertisers spent $128 million on mobile search and display advertising in the U.S., according to eMarketer research cited in the Wall Street Journal. Mobile ad spending is expected to read $187 million in 2010. That’s still tiny compared to the PC-based search market PC Internet search market, which was worth $10.9 billion in 2009 according to Credit Suisse (also quoted in the Wall Street Journal).

Search advertising constitutes around 12% of the $24.97 Trefis price estimate for AOL’s stock. AOL competes with Google, Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) in the search market, where its share has been declining for years. We expect AOL’s search market share to continue its long slide, from around 3.2% in 2009  to 1.8% by the end of the Trefis forecast period.

[trefis_forecast ticker=”AOL” driver=”1892″]

We expect mobile search advertising to grow quickly in coming years. There could be a small upside to the $25 Trefis price estimate for AOL’s stock if mobile search helps slow AOL’s search market share declines.  You can drag the trend-line in the chart above to create your own mobile search forecast for AOL and see how it impacts the company’s stock price.

YouTube deal

Under the terms of AOL’s new partnership with Google, AOL’s video content will be available on YouTube as well as on AOL sites. As of May 2010, YouTube had around 145 million unique visitors per month in the US, according to Comscore.  The average U.S. visitor viewed more than 100 videos per month in May.

Although the revenue-sharing terms were not disclosed, AOL should benefit from YouTube’s massive reach. Internet media companies typically reap more advertising revenue per page view from video than they do from text. Last year AOL’s revenue per page view (RPM) was around $3 per 1,000 impressions.

We expect the company’s RPM to slide going forward, reaching $2.65 by the end of our forecast period. However, AOL’s stock could see a 3% bounce if RPM stays constant at about $3 between now and 2016 as a result of the YouTube partnership.

In the next interactive chart you can drag the trendline to create your own revenue per page view forecast for AOL and see how it impacts the company’s estimated share value.

[trefis_forecast ticker=”AOL” driver=”1906″]

And you can see the complete $24.97 Trefis Price estimate for AOL’s stock here.

Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.
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