A Reluctant Thumbs-Up for AOL Stock

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When I was asked to write about AOL’s (AOL) new video content strategy, it took me on a trip down memory lane, back to when I covered media companies for Bloomberg in the early 2000s. At the time, the company’s public relations staff was having difficulty convincing the press to write about its original programming.

aol_logoEventually, I was cajoled into interviewing reality show guru Mark Burnett about a program he developed for AOL called Gold Rush in which contestants would search for hidden treasure. I recently came across the 2006 press release and was struck by the comments from Burnett. He said, “AOL and I are embracing this immediate future through Gold Rush.”

More than eight years later, AOL’s passion for creating original programming is as urgent as ever. There are serious questions about whether it can deliver on its still-ambitious goals, but its many opportunities to partner improve the company’s odds. That’s why, at current price levels, I give AOL stock a reluctant thumbs-up.

The Comcast of Web Video?

Dermot McCormack, the company’s recently named head of video, recently told CNET.com about his grand ambition for AOL to become the Comcast of Internet video. I am not quite sure what that means. Some AOL shows such as “Park Bench with Steve Buscemi” have gotten some buzz and the company has some deals with celebrities including Nicole Richie and Gwyneth Paltrow.

These don’t appear to be high-budget affairs, which raises questions about whether AOL has the bulk it needs to invest enough to attain its grand ambitions.

After all, Comcast is the owner of a sprawling network of channels covering everything from science fiction (Syfy) to business news (CNBC). Developing original content costs the Philadelphia-based company billions. Other players spend big as well. Netflix (NFLX), for example, raised about $400 million to invest in original content this year and will spend far more that over the foreseeable future if media reports are to believed. Amazon (AMZN) has waded further into original content with “Transparent,” an Internet comedy about a father of adult children who decides to transition into a woman. The pilot, which I have seen, is excellent.

Amazon and Comcast, however, both have a market capitalization near $140 billion. Netflix’s market value is about $23 billion. AOL’s value is just $3 billion. AOL generated about $125.9 million in cash from operations during its most recent quarter. The fact is, the bigger players have far more financial flexibility than AOL to gamble on risky content that has the chance to attract the biggest audiences. AOL isn’t even in the same league as those other kings of content.

If AOL is serious about pursuing an original content strategy, it would make sense for the company to look for a partner such as Yahoo (YHOO) or Microsoft’s (MSFT) MSN. Yahoo has grand content strategies of its own and has hired some marquee talent such as Katie Couric. MSN does far less original content, but it has a huge audience and recently invested in a redesign.

AOL has gotten ahead of itself before in original content. Remember its money-losing local play, Patch? CEO Tim Armstrong was positive that the network of 100s of hyper-local sites would capture the elusive local advertising market. Armstrong was either unable or unwilling to see Patch’s many flaws, the most important of which were small audiences and steep local competition. Earlier this year AOL sold the remaining Patch sites to turnaround firm Hale Global for an undisclosed sum. Patch’s future remains as uncertain as ever.

Stalled Stock Price

Shares of AOL are essentially flat this year even though its advertising revenues have risen. The sales gain is largely because of its push into automated advertising auctions also known as programmatic sales. The underlying ad business is pretty tepid, although it has done better than I expected.

Armstrong has touted the fact he has been able to boost revenue in this business for the first time in recent memory. The latest quarter shows a 9 percent year-over-year increase “excluding the impacts of shuttered or de-emphasized brands,” according to its latest earnings report. That’s a fancy way of brushing failures, such as Patch, under the rug. I don’t know what the unedited version of that number is, but it can’t be good.

AOL stock trades at a lofty price-to-earnings multiple of 45.5 and an 11% discount to its average 52-week price target of $48.80. Even though I have my misgivings about AOL’s stock I think investors who have high tolerance for risk should consider buying it.

It is too small to be a serious player in video realm that it aspires to, but it does have opportunities to partner. Along with Yahoo and MSN, other companies may be interested, such as Japan’s SoftBank. The time for investors to buy AOL stock is now before rumors of possible takeovers cause shares to start bubbling up again.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. You can connect with him on Twitter at @jdberr.

Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/aol-stock-4/.

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