AOL May Be Ready To Break Out

| About: AOL Inc. (AOL)

Strange as it may be for me to write this, but AOL (NYSE:AOL) may be ready to break out.

The company fell a bit on its latest quarterly earnings report, a 3 cent/share miss. The "tell" on the turn, however, comes in the form of a lay-off notice.

Specifically, according to AllThingsD, the company's Patch unit is laying off 3% of its staff and consolidating operations into fewer regional centers. The site got a copy of a memo CEO Tim Armstrong sent to the staff. The memo predicts that Patch will turn a profit this year with the changes.

That would actually put Patch on something like a schedule. Most traditional publishing ventures worked off a five year plan, with break-even scheduled for year three. This is Armstrong's fourth year in charge of the whole company, and figuring it took him a year to get control of it, Patch is due.

In that typical publishing model, the year after break-even shows a modest profit, and the second year after break-even shows the profit potential of the enterprise.

Patch is a collection of neighborhood news sites all operated off a common platform, and deserves to be evaluated on that publishing timeline. It has taken a long time to find hundreds of entrepreneurial journalists who would work for practically nothing, and to separate the wheat from the chaff in that. A quick look at various Patch sites shows there is still a lot of improvement left to be made, but the better sites are now drawing advertising, in some quantity.

If Patch can turn profitable over the next 12 months, it will take a huge anchor off the AOL boat's overall profit prospects. Behind the scenes, Armstrong has been getting control of what was an enormously wasteful infrastructure, focusing on simpler open source tools, and making what remains more like the company's cloud-based competitors.

Arianna Huffington, the loud boss of who was previously hinting at a coup against Armstrong, now admits she can't "do it all." This tells me she's no longer a problem. And the fact that the head of the company's ad network, Ned Brody, has quit for a top job at Yahoo (NASDAQ:YHOO) can be spun as bullish. It indicates that there's real talent below Armstrong.

Of course, AOL remains at heart a media company, and a media company's prospects are inherently weaker than a tech company's because people don't scale. But between the tech improvements happening in the background and the Patch profit improvements in the foreground, AOL is starting to look invest-able.

I'm not the only person who thinks so. David Manning of named AOL his pick of the day a month ago, when it was a few dollars higher than it is today.

There is plenty of time for you to get into AOL, if you wish, but the time is approaching when you should be in.

Disclosure: I am long YHOO. 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.