AOL’s Weaker Content Weighs On Display Ads Business And Valuation

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Quick Takes

  • We expect AOL’s Display Ads revenues will continue to grow but at a slower pace.
  • Intense competition is limiting the number of unique visitors to AOL properties and page views have remained flat.
  • Revenue per page views to grow at at slower pace according to our estimates due to competition.

In an attempt to turnaround its display ads revenues, AOL (NYSE:AOL) is focusing on building strong interactive content across its properties that is expected to better the user experience. AOL has pushed initiatives such as live video feeds on Huffington post to attract more users, and to bring in new advertisers to help display ad revenues.

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However, these efforts have not yet led to growth in display ads revenue for the company due to intense competition in this segment. Moreover, content on AOL is primarily news based and has failed to achieve user engagements similar to its competitors like New York Times (NYSE:NYT),  The Wall Street Journal and CNET. We currently estimate AOL’s stock price at $25, which is 35% below the current market price.  We explain our analysis for display ads revenue and why we think the upside is limited.

See our complete model for AOL here

Limited Upside For Unique Visitors On AOL Websites

Display ads revenue makes up about 30% of AOL’s value and contributes nearly 50% to its total revenues. Unique visitors on the AOL websites is an important driver for display ads revenue. AOL primarily operates its properties in the U.S. where the competition from incumbents such as Yahoo is intense. Although, AOL has excellent properties in its portfolio such as Huffington Post and Tehcrunch, they are competing against specialized sites such as the New York Times, The Wall Street Journal and CNET. In a bid to differentiate its properties and increase user engagement, AOL had introduced video content on these websites. Although these initiatives have increased the number of unique visitors on AOL websites, we believe that the upside to this driver is limited.

We believe AOL will find it difficult to poach visitors from its competitors. We currently estimate that the unique visitors for AOL will grow from 113 million per month in 2012 to 127 million unique visitors during our forecast period. In the event that the company fails to live up to these estimates and its unique visitor share shrink, this would reduce our price estimate for the company further.

Revenue Per Page View Expected To Grow At A Slower Pace

Revenue per 1,000 page view (RPM) is one of the most important drivers in our valuation of AOL’s display ads division. We believeAOL will find it difficult to report any meaningful increase in RPM because of intense competition. Advertisers have a choice to advertise over well established display ads portals such as Facebook, etc. and specialized news services that provide better user engagement, web traffic or both. We estimate that RPM declined in 2012 to $2.96, but we estimate that it will grow to around $3.40 by the end of our forecast period.

These drivers are important because they directly impact AOL’s display ads division, which according to our estimates makes up around 30% of the company’s total value. We project moderate growth in unique visitors on AOL websites and revenue per 1000 page views due to intense competition in display ads space.

We currently have a $25 price estimate for AOL, which is approximately 35% below the current market price. You can change our assumptions to derive your own price estimate.

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