This Company Is Hanging on Despite the Odds

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Call me old school, nostalgic, or simply resistant to change, but I’m one of few people who still sends and receives email via AOL (NYSE: AOL) mail. So many times I’ve been looked at in dismay when at Starbucks writing up a story on my laptop and checking email when that famous line broadcasts to everyone in earshot, “You’ve Got Mail!”

This is quite a conversation starter at times, with some curious (and hip) people bound to say to me, “AOL is still around?!”

Indeed, the company is still around, and it’s taking much-needed steps to avoid the fates of its peers that were riding high during the late 90s and early 2000s. Remember Netscape and AltaVista?

While I don’t think AOL will go the way of these once dominant players, it does have its work cut out for it as it faces stiff competition. A main focus will be improving its ad revenues, especially from display advertising. Ridding itself of the money thirsty Patch.com hyperlocal news site, if it fails to turn a profit could help too.

Shares of AOL climbed steadily last year, managing to recover from a double-digit drop following the divvying up of a hefty patent sale. While it still faces some hurdles that could affect its value, 2013 may turn out to be one of AOL's most profitable if it capitalizes on the momentum it is currently enjoying. AOL’s total return is up 132% over the last year versus the S&P 500’s total return, which is up just 18.97%. That compares to Google’s (NASDAQ: GOOG) total return increase of just 9.68%, and Facebook’s total return decrease of 0.11%.

Of note also is AOL's free cash flow, which improved 27% to $71.5 million during the third quarter of this year. Operating income was $43.1 million during this year’s third quarter, which was a whopping 401% increase over what they totaled during the same period last year. The company’s earnings per share for the third quarter were $.22. That compares to an earnings per share loss of $.02 the company suffered during the third quarter of 2011.

AOL, once the top Internet provider, took several steps last year that should help it bolster its position in the technology sector. One of the things the company is trying to improve is display advertising. It derives about a third of its ad revenue from U.S. display ad revenue. Unfortunately, its revenues from U.S. display ads fell roughly 3% during the third quarter. If Wall Street analysts are correct, the company’s revenues from this source dropped further in the fourth quarter. On a brighter note are revenues from international display ads. They were up 18% in the third quarter. AOL will release its fourth quarter and fiscal 2012 results on Jan. 28.

Observers remain doubtful if the company’s efforts to improve revenues from display ads will lead to a significant increase in overall revenues. This goes back to the competition it faces. Consider this. While AOL is among the top five in terms of its revenues from display ads, it is a distant fifth from top dogs Google and Facebook.

<img src="http://www.emarketer.com/images/chart_gifs/144001-145000/144471.gif" />

As you can see, Google led the pack last year, and it is expected to continue to net the most display ad revenue share this year and next year. You can also see that AOL’s share is expected to drop to just 2.7% next year, well behind the 21.2% Google will have carved out. Yahoo! (NASDAQ: YHOO) accounted for 9.3% of total display ad revenues last year, while Microsoft (NASDAQ: MSFT) and AOL each made up less than 5% of the total. All three will lose more market share as Google and Facebook expand.

AOL made a key move in December by acquiring Buysight to help it expand its position in the display market by improving its re-targeting and intent-based targeted advertising solutions, according to peHub, which summed the transaction up this way:

“Buysight brings proven Dynamic Creative Optimization and machine learning capabilities that will further enhance AdLearn, AOL’s market-leading optimization engine, and its ability to provide brands and performance marketers a comprehensive and integrated optimization solution across channels.”

AOL also made a brilliant move when it sold a ton of patents and returned the profits to shareholders. Specifically, AOL sold 800 patents to Mr. Softy in the spring of last year for $1.1 billion.

Another cause of concern for shareholders is Patch, a hyper local online news site AOL launched to diversify its offerings. What was thought to be a boon in providing news, and luring advertisers, has been slow to gain steam. However, AOL remains steadfast in keeping it alive, noting that Patch’s revenue is up over 100% and usage is up 40% compared to last year. It is on pace to achieve 2013 run-rate profitability, according to AOL, which is pinning some hope on the recent appointment Steven Kalen as the president and COO of Patch. He hails from radio network Westwood One where he was also COO.

AOL has continuously outpaced the major indexes. However, there remains concern over how the stock can maintain this pace. AOL is up by almost 120% over the past year. Don't count it out just yet.

(and FYI; I'm not biased in my email choice; I use gmail, yahoo and Microsoft Outlook, too!)

 

 


TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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