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Introduction

AOL Inc. (NYSE:AOL) is a diversified service company on the web, known for their Time Warner merger fiasco. After the reverse merger, AOL has come back strong, and is showing the potential to become a phenomenal investment opportunity.

Qualitative Analysis

Source: Information pertaining to AOL came from the shareholder annual report

Some of the biggest accomplishments in 2011 made by AOL include: AOL returning to ad-revenue growth for the first time in three years, reduction in subscription growth decline, reduction in expenses, acquisition of The Huffington Post, repurchase of 10% of shares outstanding.

AOL has a diversified portfolio of businesses, with the most unique properties being Aol.com, The Huffington Post, and MapQuest. Aol.com has 12 million unique visitors per day. With mapquest.com ranked number 2 in the maps category during 2011. The Huffington Post surpassed the New York Times in monthly unique visitors. The Huffington Post also surpassed 1.5 billion page views per month during the year of 2011.

(click to enlarge)

AOL is split into two different business divisions, AOL properties and AOL advertising. AOL properties are its publishing platform of content, consumer products, and services. AOL properties are primarily represented by its web properties like: MapQuest, Daily Finance, engadget, and Huffington Post.

AOL advertising generates advertising revenue, and is generated when a consumer clicks a text-based ad on their screen. AOL partners with Google in that Google is the search engine service for AOL, AOL shares a part of the search key-word ad-revenue with Google. During 2011, AOL was able to generate $335.3 million in revenue through this revenue share deal, with total revenues totaling $1.2 billion from AOL properties.

AOL aggressively competes for market share with companies like Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), New York Times (NYSE:NYT), News Corp (NASDAQ:NWSA), Thomson Reuters (NYSE:TRI), CBS Corp (NYSE:CBS), NBC (NYSE:GE) among many others.

AOL has a unique, diversified, growing business portfolio. After the reverse merger, green shoots are emerging everywhere for this powerhouse. I am optimistic on the qualitative factors.

Technical Analysis

The stock has been on a continuous up-trend since 2012 January. On 12/24/2012 the stock is between a very narrow symmetrical triangle formation. I anticipate the stock to break out no later than the 26th or 27th, meaning that the stock will be forced to make a major move.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading below the 20-, 50- Day Moving Average, while trading above the 200- Day Moving Average. The stock will experience further upside through 2013, as investors have under-bought the growth prospects of the company.

Notable support is $20.60, $23.60, and $28.50 per share.

Notable resistance is $34.50, $37.50, and $40.00 per share.

Street Assessment

Analysts on a consensus basis have atmospheric expectations for the company going forward.

Growth Est

AOL

Industry

Sector

S&P 500

Current Qtr.

69.60%

212.10%

9.00%

9.50%

Next Qtr.

72.70%

N/A

29.10%

15.30%

This Year

9166.70%

30.90%

5.30%

7.20%

Next Year

-87.20%

40.20%

5.10%

13.10%

Past 5 Years (per annum)

-41.99%

N/A

N/A

N/A

Next 5 Years (per annum)

116.05%

16.65%

14.16%

8.72%

Price/Earnings (avg. for comparison categories)

2.74

34.8

-6.94

14.69

PEG Ratio (avg. for comparison categories)

0.02

2.01

0.3

1.41

Source: Table and data from Yahoo Finance

The company shows phenomenal growth as analysts on a consensus basis have a 5-year average growth rate forecast of 116.05% (based on the above table). This growth rate is above the industry average for next 5-years (16.65%).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.16

0.07

0.1

0.17

EPS Actual

0.23

0.22

10.17

0.22

Difference

0.07

0.15

10.07

0.05

Surprise %

43.80%

214.30%

10070.00%

29.40%

Source: Table and data from Yahoo Finance

The average surprise percentage is 95.8% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2009

$ 2.35

8.54

2010

$ (7.34)

-

2011

$ 0.13

100.23

2012

$ 11.12

2.71

Source: Table created by Alex Cho, data from shareholder annual report

The EPS figure shows that throughout the 2009-2012 period, the company earnings have recovered significantly after the Time Warner reverse merger deal. The $11.12 in earnings per share was due to a one-time patent sale to Microsoft and should not be figured into the long-term growth forecast.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business has had historical issues with management. Therefore one of the largest risk factors to AOL is the daily management of the company. So as long as the executive team is able to re-produce the earnings beats it has done over the past year, the stock holds a lot of potential.

(click to enlarge)

Source: Forecast and table by Alex Cho

By 2018 I anticipate the company to generate $7.64 in earnings per share. This is because of earnings growth, product development, recent acquisitions, improving global outlook, earnings management and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 4 years and the next 6 years. Detailing 10 years in pricing based on my forecast and price history on December 31st of each year.

(click to enlarge)

Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

AOL currently trades at $30.17. I have a price forecast of $38.60 for 2013. AOL is in a long-term up-trend. I anticipate fur momentum in the price of the stock, as the growth rate offers compelling stock appreciation for the foreseeable future.

Short Term

Over the next twelve months, the stock is likely to appreciate from $30.17 to $38.60 per share. This implies 28% upside from current levels. The technical analysis indicates an up-trend (break above the symmetrical triangle formation). While the previously mentioned price forecast using fundamental analysis further supports the trade set-up.

Investors should buy AOL at $30.17 and sell at $38.60 to pocket short-term gains of 28% in 2013.

Long Term

The company is a great investment. I anticipate AOL to deliver upon the price and earnings forecast despite the risk factors (macroeconomic, competition, etc.). AOL's primary upside catalyst is product development, international development, and earnings management. I anticipate the company to deliver upon my forecasted price target of $207.58 by 2018. This implies a return of 588% by 2018. This rate of return is exceptional, considering AOL has a market capitalization of $2.5B. The lack of liquidity makes this a compelling growth investment for small investors. But will be a sore spot for larger institutions that require more liquidity.

Conclusion

Buy AOL on short and long-term growth. AOL has not died off the surface of the earth. The company is making a strong comeback.

Source: AOL: The Hail Mary Pass Of 2013