The Good News: AOL Beats Forecasts! And Now For The Bad News…

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

AOL’s $0.23 a share in earnings this past quarter beat analyst estimates handily. The prognosticators were guesstimating $0.16 a share in earnings, and a drop in revenues of about 5%. Turns out AOL (NYSE: AOL) only saw a quarter-over-quarter decline of 3%.

Also on the positive side of the fence were advertising revenues. As AOL watchers well know, management is clearly shifting the focus from internet services to advertising. Ad revenue increased by 10%, a bright spot certainly. But internet revenues continued to decline, by 18% this past quarter from 2010. CEO Tim Armstrong said the company is going to work at getting the internet business going again, though he realizes they’ll have to “…stretch to get there” in 2012. Realistically a return of any significant revenue finding its way to the bottom line from their internet subscriber base is pretty slim.

On the flipside of the AOL coin are these few tidbits. Though the company did beat estimates, those estimates were severely beaten down. AOL barely earned a third of what they did in Q4 of 2010 -- $22.8 million vs. $66.2 million last year. The aforementioned drop in revenue for the quarter didn’t help matters. But what’s really scary is that with yesterday's run-up – you know, because of all the good news – AOL is currently trading at nearly 135 times earnings. And now for Freddy Kruger scary -- the $17.75 (give or take) shares are trading for now equates to about 50 times forward earnings.

Now, the shift in model for the company certainly makes sense. The market for dial-up internet service is limited to say the least, as are the security and other ancillary services the company offers. But a concern for investors has to be the shift to advertising and desire to become an internet news source. That runs AOL directly into the path of market leader Google (NASDAQ: GOOG) and Yahoo (NASDAQ: YHOO). Now with Facebook publicly competing for investors' dollars soon that’s a pretty crowded playing field, and some of those boys and girls don’t play nice.

File this under the “For What it’s Worth” section, but virtually the entire company is owned by mutual funds and other institutional investors. Doesn’t mean you can’t go buy a few shares -- they sell them too -- or enjoy the run-up while it lasts. But these institutional guys have the means and the incentive to look out for themselves first and ask questions later. Pessimistic? Yeah probably, but it’s worth noting and you can take from it what you will.

If you’re enjoying the ride, good for you. Just don’t get too comfortable because it’s going to get harder, not easier for AOL. And they're already an expensive proposition. If profit is there, investors would be wise to take it before it's too late.

The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.

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