AOL Is Deserving of a Long, Hard Look

Source: Getty Images

Source: Getty Images

AOL (NASDAQ: AOL) has had a rough month, losing 20 percent of its valuation following earnings. Yet, despite its quarterly weakness, the company continues to thrive in programming and online videos, a space that has become highly valuable due to its explosive growth. With that said, many are anticipating a Yahoo (NASDAQ: YHOO) acquisition, but regardless, investors might want to take a long hard look at the stock, as its one key growth segment could create long-term value.

Forrester Consulting has shown how the growth of video advertising impressions through real-time bidding (RTB) marketplaces have grown in recent years. These RTBs are used to target certain consumers automatically, such as what video ad would be most effective on a specific YouTube video. In 2013, advertising impressions rose 85.6 percent to 104.1 billion, and this year, it’s expected to increase 71.5 percent to 178.5 billion. Hence, these numbers translate into a growing video ad market.

Essentially, AOL is capitalizing in this space. The company has invested heavily into online marketplaces for the automated purchasing of advertisements, specifically in the video world, which consequently has helped to grow AOL’s ad revenue.

With that said, AOL saw total revenue growth of 8.4 percent in the first-quarter to $583.3 million. However, advertising as a unit increased 16 percent to $433.4 million, and within the advertising segment includes its third party platform — automated purchasing of advertisements — and this unit grew 55 percent to $186.9 million. Hence, this one unit, accounting for 32 percent of total revenue, is responsible for all of AOL’s growth.

The rest of its business, including subscriptions and global search and display, are seeing year-over-year losses. As a result, when you understand that AOL is going through a transition, admittedly so, investors can look past the short-term bad to realize that it has a legitimate and valuable segment on its hands with its third-party advertising platform technology.

Moreover, this is a growing company that’s currently trading at 1.24 times sales, far cheaper than Yahoo at 7.5 times sales, a company with no growth. With that said, there’s been a lot of speculation regarding Yahoo’s potential interest in acquiring AOL following its divestment in Alibaba. Certainly, AOL could likely help Yahoo to grow its advertising business, and would also allow Yahoo to acquire a similar company at one-seventh the price of its stock. There might be some logic behind the speculation.

Nonetheless, AOL shares have now fallen 20 percent this year, and the only noticeable difference between it and Yahoo is that AOL is growing, cheaper, and doesn’t have Alibaba. Thus, regardless of what Yahoo decides to acquire, AOL looks like a solid investment on its post-earnings weakness.

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