Project Devil 2 - Game’s on For AOL?

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

AOL (NYSE: AOL) is one of the top performing stocks for the year, with its share price surging more than 150%. In addition to its strong fundamentals, the company is also gaining due to a shift in investor interest from Web 2.0 internet stocks like Facebook, Zynga, and Groupon to traditional internet companies like AOL, Google, and Yahoo!. The following chart summarizes stock price movement of Web 2.0 internet companies and traditional internet stocks post-Facebook listing.


<img src="/media/images/user_14395/chart_large.PNG" />

While Google (NASDAQ: GOOG) benefited from waning concerns that Facebook poses a significant threat to its business and can topple it in online advertising markets, Yahoo! (NASDAQ: YHOO) benefited from Marisa Mayer taking over as CEO. AOL was the biggest beneficiary, with both improving fundamentals and its $1 billion patent sale to Microsoft. I believe all Google, Yahoo!, and AOL have solid prospects going forward. In this article, I will be presenting my long thesis on AOL.

AOL is all set to deliver a healthy future growth with Project Devil, its Patch Deal, and M&A strategy, which have become integral parts of the company’s strategy to bringing incremental revenue now.

1) Project Devil

AOL maintains its Ad Uniqueness and Rich Media Access with the innovation of “Project Devil,” which aims at the premium display ad unit, enhancing consumer experience, and improving the aesthetic quality and interactivity of  by DownloadNSave">online brand advertising. With these features, Devil Ads are increasing in popularity, as many advertisers are purchasing them. Devil Ads engagement rate is almost 6x the industry average (10.12% vs. 1.58%), and the ads have better interaction rates, click thru rates, display time, average video play time, and increased purchase intent by 263%. Furthermore, AOL has announced its next phase, Project Devil 2 ,which is intended to present sharpened focus that recognizes different advertiser needs and to draw in marketers from particular ad categories (entertainment and retail brands). 

<table> <tbody> <tr> <td> </td> <td> <p>AOL</p> </td> <td> <p>Industry</p> </td> </tr> <tr> <td> <p>Engagement rate</p> </td> <td> <p>10.12%</p> </td> <td> <p>1.58%</p> </td> </tr> <tr> <td> <p>Interaction Rate</p> </td> <td> <p>9.82%</p> </td> <td> <p>1.43%</p> </td> </tr> <tr> <td> <p>Click Thru rate</p> </td> <td> <p>0.29%</p> </td> <td> <p>0.15%</p> </td> </tr> <tr> <td> <p>Engagement Time</p> </td> <td> <p>47 Seconds</p> </td> <td> <p>14 Seconds</p> </td> </tr> <tr> <td> <p>Ad Display Time</p> </td> <td> <p>95 Seconds</p> </td> <td> <p>59 Seconds</p> </td> </tr> <tr> <td> <p>Average Video Play Time</p> </td> <td> <p>24 Seconds</p> </td> <td> <p>12 Seconds</p> </td> </tr> </tbody> </table>

2) Patch Unit Growth

Patch, the local news division, saw its traffic jump to 11.9 million unique visitors, up 19% from a year ago, driven by the Presidential Election and Hurricane Sandy. The Presidential Election increased Patch's traffic for breaking news surrounding the debates from both current and new users. It can be also noted that Political advertising revenue was higher than what it was two years ago. Hurricane Sandy's contribution to the traffic growth is led by news updates and information about the local community services. Patch included new features of coupon search and aggregation capabilities. The division charges a ~$50 CPM, which will contribute to its expected earnings of ~$40-50 million in year 2012, compared to ~$16 Million in 2011.

3) Merger & Acquisitions

AOL is executing its current strategy to come up with attractive content to generate more readers with its acquisition of Huffington Post (one of the biggest acquisition in journalism and a globally scaled platform). Huffington Post channel, which AOL has started in 3Q 2012, has differentiated itself from competitors by providing a social viewing interface. The company has been able to sell sponsorships and video ads during the live segments with this product, which will generate ad revenues in the longer term. Its Global Advertising revenue grew 7%  compared to the third quarter in 2011, bringing the total to ~$340 million.

To sum up, I will say that AOL's potential is not limited only to the Patch Unit and the Devil Project. The company is heading in the right direction in a partnership with Yahoo! and Microsoft. The deal aims at selling each other’s “Class 2 display” inventory, which will further improve monetization on better terms.

The company has come a long way in the short run by expanding its portfolio deal with YouTube. AOL has recently added its video library to YouTube's massive collection, where viewers can enjoy almost 20,000 videos from The Huffington Post, TechCrunch, and Moviefone. Additionally, AOL is among the top five most trafficked sites in the U.S. with unique visitors of ~111 million in 3Q 2012 showing a growth of 4% year over year. With its strong balance sheet of ~$400 million and its shareholder friendly approach that includes repurchasing 30% outstanding share by the end of 2012, AOL looks like a good option for investors.

ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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