AOL (NYSE:AOL) is suddenly a hot stock.
The company reported growth for the first time in years in its latest quarterly report, for the period ending in December, and CEO Tim Armstrong was on TV right after, speaking fluent buzzword. (At one point CNBC host David Faber repeated Armstrong's words back to him and asked, "what do you mean?")
But if you think this means AOL is out of the woods and worth buying, think again.
The bulk of the gain came from third-party ad sales, that is, sales made on behalf of other publishers. Results at AOL-owned properties like The Huffington Post lagged, the dial-up part of the business continues to deteriorate, and the local Patch sites are still not making money.
Armstrong thinks that ad buying will move to "trading desks," with inventories bid on like stocks and bonds. That's nice, but is AOL's future as an ad network? If it is, what's the rest of the company about?
The good news in the last year's results is that the company's enormous development costs are being whittled down, with long-overdue moves being made to Internet standards and open source. Cost cutting has been behind the profit gain. This is the first growth in the top line that Armstrong has experienced.
But the good news hides a lot of bad. Most of the businesses Armstrong claims he wants to move toward still aren't moving forward. Patch, in particular, is looking like a black hole. The group's main rival, an NBC effort called Everyblock, announced this week it would close, but that doesn't mean money is going into Patch, which is still dominated by national advertisers. Armstrong admitted that Patch fell 25% behind projections, generating total revenue of just $40 million.
Armstrong thinks further gains are possible as the industry moves from banner and box ads to TV-like video ads, but the annoyance factor on those ads is extreme, with many users clicking away from pages that start sounds playing without their authorizing it, ignoring ads that don't do that.
Unless AOL is about to become a third-party ad network and then sell to a larger player - in other words, the company is still broken on too many levels to be considered a good investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.