AOL Should be at $14 Until Strategy is Clarified

Much like the scathing remarks from Daniel Loeb towards Yahoo (NASDAQ:YHOO), AOL (NYSE:AOL) investors Starboard Value LP criticized the company for its unprofitable display advertising business. ^[1] However, given the obsolescence of its dial-up business, online advertising provides the only real business the company has in the near future.

See our complete analysis for AOL’s stock here

Strategic Investments Can be Recovered

The revenue recovery for AOL has come at the expense of a steep drop in gross margins for 2011, which came about as the company invested heavily towards online advertising initiatives such as Project Devil, as well as developing display content for mobile devices like the Editions magazine for the iPad.

While CEO Tim Armstrong may not have hit the bull’s eye in every such venture, Q3 2011 results have shown that AOL is capable of advertising growth. Additionally, by combining its dial-up and web services together, ^[2] it seems clear that the company intends to solely be a display content business, possibly spinning-off the combined division.

We have a revised price estimate of $14 for AOL stock, which is roughly 5% below the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Bloomberg: AOL Needs ‘Immediate Action’, Investor Says [↩]
2. Bloomberg: AOL Reorganization Will Merge Dial-Up Unit with Web Services [↩]