I have been a long time bear on the stock of AOL Inc. (NYSE:AOL). The stock has been a long term underperformer since its merge days with Time Warner (NYSE:TWX). Since the spin-off of the company I have been waiting for the company to report earnings to decide on whether to jump in and pick up shares or stay on the sideline. The stock surged initially after its IPO but since then has settled in at much lower levels. So, is now the time to buy shares of AOL?
AOL has emerged as a company that derives significant portions of its revenue from advertising, Internet service, and search. AOL continues to focus its efforts on content creation since the company sees online media as its future. The recent addition of the Huffington Post, TechCrunch, and Engadget show the company’s commitment to acquiring successful online content providers. The company has invested heavily in its Patch social platform.
AOL has struggled to gain traction in the search market as the company has seen increased competition in the sector. Google (NASDAQ:GOOG) remains the dominant player with a 65% market share and Bing is coming on strong with 13.5% of the market. Yahoo remains solid with 18% of the search market. AOL’s market share has dwindled from just under 2% down to 1.4%. The company’s search division will need to be combined with a larger company if AOL ever wants to become a relevant player in the industry.
The media company is set to report earnings this coming week and Wall Street is looking for decent results. Earnings are estimated at 17 cents per share on revenues of $536 million dollars. Full year earnings are projected at $1.14. The stock is currently trading at $20 per share. That places a price to earnings multiple of 18 on the stock. Even the most optimistic analyst would be surprised if the company could grow earnings at this rate for the year.
The best way to get a look at how the new entity is performing is to take a look at last quarter’s numbers. There were a few bright spots but the company had a lot of negative numbers too. The good part is that the company was able to increase its cash position to $750 million dollars. The company is claiming that its newest social media site Patch will be profitable this year.
The bad news is that the company’s ad revenue decreases nearly 30% last quarter and its display ad business declined nearly 15%. Revenue was down 26% year over year last quarter,
The stock is looking properly valued on a fundamental basis. AOL trades right in line with its book value and sales. AOL has been dropping in price over the past year and is finally reaching the buy range. $17 to $18 a share would be ideal for picking up shares of AOL.