AOL Stock Soars 60% in 2013 … Say What?

by Tom Taulli | November 20, 2013 11:28 am

AOL (AOL[1]) has shown that a crusty old tech company can find ways to regain some of its former glory. In fact, lately it’s actually been looking like a hot operator a la LinkedIn (LNKD[2]) or Facebook (FB[3]). So far in 2013, AOL stock is up over 53%.

As should be no surprise, the turnaround has been far from easy. Perhaps the biggest challenge for CEO Tim Armstrong has been to make the transition from AOL’s legacy subscription dial-up Internet business to an ad-based model.

But to get AOL stock moving again, there was little choice but to do some heavy lifting and make the painful changes.

AOL Stock Could Keep Climbing

Armstrong had already made some smart bets for AOL along the way. He leveraged AOL stock and excess cash to pick up strong media brands like The Huffington Post, Engadget and Techcrunch. He also continued to invest in these assets, such as by aggressively moving into global markets and adding features like video. In fact, HuffPost gets nearly 80 million global consumers a month.

But to keep AOL stock chugging over the long haul, Armstrong also made important deals for next-generation technology platforms.  One example of was the acquisition of Adap.tv, which is a top player in the fast-growing programmatic video advertising market. The system makes it extremely easy to put together campaigns, which are continually optimized. And for AOL, it means that it does not have to devote much headcount to the operation — which should lead to rising margins.

Ironically enough, the dial-up business may also be a driver for AOL stock. After all, the infrastructure could prove valuable for offering premium services, including via mobile devices. For example, AOL has been experimenting with something called Gathr, which allows users to create bundles of offerings from companies like Pandora (P[4]), Amazon.com (AMZN[5]) and Apple’s (AAPL[6]) iTunes. Not only can AOL leverage its massive integrated billing system, which can handle tens of millions of subscribers, but also engage in cross-promotion with its membership base.

And, of course, there’s the buzzword of the year for tech companies: mobile. Over the past few years, Armstrong has integrated this across the product offerings and it seems to be getting traction.

Yet there are still some issues for the company, which could turn into headwinds for AOL stock. Just look at Patch, which is a network of local news sites. While it has about 18 million users, the service has been a financial black hole. The business resulted in a restructuring charge in Q3 of $19 million as well as an impairment charge of $25 million. On the latest earnings call, Armstrong noted that he was looking for “strategic alternatives,” which is often a code word for selling out.

Despite all this, AOL still looks poised to benefit from the strong trends in online advertising and mobile. Besides, the valuation of AOL stock is fairly reasonable, trading at just 19 times forward earnings. This compares to FB stock, which trades at a multiple of 42, and LNKD stock, which trades at a multiple of nearly 100.

In other words, for investors looking to get exposure to mobile and the growth in digital media, AOL stock does look like an attractive option.

Tom Taulli runs the InvestorPlace blog IPO Playbook[7]. He is also the author of High-Profit IPO Strategies[8], All About Commodities[9] and All About Short Selling[10]. Follow him on Twitter at @ttaulli[11]. As of this writing, he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/11/aol-stock/

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