Sustaining Search Market Share Important for AOL’s Stock

-14.63%
Downside
49.99
Market
42.68
Trefis
AOL: AOL logo
AOL
AOL

AOL (NYSE:AOL), which competes with Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) in the search advertising market, has seen its share decline from 9% in 2005 to 3.7% in 2009 in the US Search market.

We believe that AOL will continue to lose US search market share and reach 2.8% share by the end of Trefis forecast period.

Relevant Articles
  1. U.S. Digital Advertising Landscape And Key Players (Part 2)
  2. U.S. Digital Advertising Landscape And Key Players (Part 1)
  3. With AOL In The Bag, What’s Next For Verizon?
  4. AOL To Be Acquired for $4.4 billion By Verizon
  5. AOL Earnings: Third Party Ads Boost Revenues Yet Again
  6. AOL’s ‘ONE by AOL’ To Boost Its Programmatic Ad Platform

Furthermore, there could be a downside of 10% to the $28 Trefis price estimate for AOL’s stock if the company’s search market share declines at a faster rate than we expect and reaches 1% by the end of Trefis forecast period.

Below we explain the significance of the search advertising business to AOL’s stock and reasons why it will continue to lose market share in the US search advertising market.

Search Advertising Business 17% of AOL’s Stock

We estimate that the search advertising business constitutes 17% of the $28 Trefis price estimate for AOL’s stock. Google leads the US search advertising market with a share of 66%.  In comparison, Yahoo, Microsoft and AOL have market shares of 20%, 7% and 4%, respectively.

AOL Search Market Share Declines Will Continue

We believe there are two main reasons why AOL will continue to lose market share in the US search advertising market:

1.  Declining AOL subscriber base will negatively impact AOL search share

AOL’s dial-up internet subscriber base constitutes a significant portion of users that use AOL”s search engine.  However, AOL subscriber counts have been in decline.  We expect the number of dial-up internet subscribers for AOL to decline from around 5 million in 2009 to nearly zero in the long term as broadband internet services continue to win AOL customers.

2.  AOL is not positioned favorably for mobile search

An increasing number of searches will come from mobile smartphones like the iPhone, BlackBerry, Nexus One and Droid.  Google and Microsoft are competing to position themselves as the default search engines for many new smartphones by introducing mobile operating systems such as Android and Windows Phone 7.  In comparison, players like AOL and Yahoo are not the search engines of choice for mobile phones.  Both of these companies are increasingly dependent on attracting users to their content portals (Yahoo Finance, AOL Health) to help drive search.

10% Downside to AOL’s Stock if Search Market Share Declines at a Faster Rate

Although we forecast that the AOL search market share will decline to around 2.8% in the US search advertising market, there could be a $2.5 (10%) downside to the $28 Trefis Price estimate for AOL’s stock if the company’s market share declines to 1% by the end of Trefis forecast period.

You can modify our forecast for AOL US search market share above to see how AOL’s stock will be impacted if it were to decline more than we forecast.

For additional analysis and forecasts, here is our complete model for AOL’s stock.