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Despite the incessant competition from giants like Google (NASDAQ:GOOG) and Facebook, AOL (NYSE:AOL) is down but not out yet as the company’s advertising business showed a 15% growth in revenue in Q3 vs last year. The company’s stock saw almost 12% growth since 1st November, [1] helped primarily by a robust growth in its affiliate (third party) advertising revenue.

AOL Still a Mixed Bag

While AOL’s operating loss was better than what was expected, the company’s results remain a mixed bag with revenue declines in both subscription (-22%) and search advertising (-15%) from last year. Having said that, we believe that AOL’s pre-Q3 market price was already reflecting the expected declines in these 2 operating segments given that competition continues to keep AOL restricted to a single-digit market share in the search segment. [2] The stock relief has undoubtedly come from healthy metrics in AOL’s display advertising, such as a growth in monthly unique visitors for both AOL Sites and Huffington Post, and traffic growth for community-based websites such as Patch.

(Chart created using Trefis' app)

However, investors should not be too excited just yet as AOL’s search and subscription would continue to weigh down on the company’s top-line growth in the future as well. What the company needs now is a consistent growth trend in its display ads for the coming quarters. This should at least make AOL’s core business more bankable for investors.

We have a revised price estimate of $14 for AOL stock, which is roughly 8% below the current market price.

Notes:

  1. Google Finance: AOL
  2. comScore Releases September 2011 U.S. Search Engine Rankings

Disclosure: No positions

Source: Confidence Grows For AOL's Display Ad Business