AOL Left Out of Tech Frenzy? CEO Says Stock Undervalued

Posted by Adam Sharp - Monday, June 20th, 2011

AOL recently (and proudly) pointed out that HuffingtonPost.com, which they bought in March for $315 million, has surpassed the New York Times in web traffic for the first time.

Here's a graph showing unique visitors to HuffingtonPost.com (blue) and NYTimes.com (green).

Clearly, the company's web business looks brighter with the HuffPo purchase. But are the shares cheap?

At a recent investor conference, AOL chief Tim Armstrong suggested so. He pointed to recent IPOs, such as LinkedIn (LNKD), as proof. From the WSJ:

As fledging Internet companies make splashy public-market debuts, Tim Armstrong is feeling left out.

In his opening remarks during a day of presentations to investors last week, the AOL Inc. chief executive pointed to the high-flying valuations of smaller technology companies that have recently gone public, some without profits, as a sign investors have "severely undervalued" AOL.

..."I believe if we had taken everything we showed you today separately and trotted it down a few blocks from here to Wall Street and showed them what we've seen, I think the valuation of this company would be dramatically different," he said.

Mr. Armstrong is arguing that his company, when viewed as a sort of web-startup-reborn, is cheap. They're re-shaping the business with a focus on their web properties, starting with HuffPo.

AOL does appear to be making gains in the web side of its business. And the company's current valuation is below both its book value ($21.60/share) and annual-revenue ($2.3b). So there may be a bullish case for the stock.

AOL's legacy business, dial-up internet access, is in late-stage revenue decline. Somehow, the company still has around 9 million internet subscribers, but they're dropping off at a rapid pace. Nobody wants dial-up internet these days, and the shift to high-speed has caused negative revenue growth at AOL for years.

But the web-content business (and associated advertising revenue) is picking up. In the first quarter of 2011, AOL's display advertising notched up 4% to $135m. They managed a slight profit of 4 cents a share in Q1.

The real test will come when they report second quarter numbers, which will include revenue from the Huffington Post (purchased in March). So far, the HuffPo purchase is appears to be a good call. The addition of Arianna Huffington as editorial head is also being viewed positively by analysts.

But investors will want to see how well this new asset is being monetized, and how it's growing (according to the graph above, it's doing quite well traffic-wise).

To justify a higher valuation, though, AOL will need to put up big numbers in display-advertising for Q2.

Let's take a look at some key stats for the co:

  • Share Price: $20.22
  • Market Capitalization: $2.19b
  • Annual Revenue: $2.3b
  • Revenue Growth (year-over-year): -17%
  • Cash: $381m
  • Debt: $96m

The negative revenue growth, caused by dial-up subscriber drop-off, is clearly limiting the stock's potential. If they can successfully ramp up traffic and ad-revenue from their online properties, the stock might look dirt-cheap at today's prices, a few years down the road. But that's a fairly big if...

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