Is AOL Turning the Corner?
There's nothing encouraging about AOL's (NYS: AOL) quarterly report this morning at first glance. Revenue fell 8% to $542.2 million. The meandering dot-com giant posted a net loss of $0.11 per share. Wall Street was expecting a small profit during the second quarter. After a few market-thumping reports, AOL has now sorely missed analyst profit targets for the second quarter in a row.
The fact that the stock is plunging to a new low on the news today may be scaring potential buyers from digging any deeper than that.
Big mistake.
The $319 million that AOL generated in its global advertising business marks the first time that ad revenue has inched higher in three years.
There are plenty of moving parts behind the turnaround, with enough asterisks to fill the sky with stars. AOL has gone on to acquire The Huffington Post and TechCrunch over the past year, generating incremental ad revenue through a pair of content sites that attract high advertising rates.
However, AOL has also sold off its ICQ messaging platform and Bebo social networking site.
In other words, with so many properties coming and going through AOL's revolving door, it may take some time before we get an accurate idea of how the company is doing.
This is still an important achievement for CEO Tim Armstrong, who may have bitten off more than he could chew when the former Google (NAS: GOOG) executive inherited the rudderless online empire less than two years ago.
We all know that subscription revenue will continue to sink. Premium access accounts peaked at 26.7 million nine years ago, and it's been gradually tanking ever since. We are now down to 3.4 million homes waking up to "Welcome" screens, a 21% slide over the past year.
Every quarter that AOL doesn't sell off its access business to Earthlink (NAS: ELNK) , United Online (NAS: UNTD) , or any other interested provider makes it that much less valuable. If these captive customers are critical to AOL growing its more promising ad business, shouldn't it invest in growing this market instead of passively letting it shrivel away?
Obviously, this shouldn't take away from AOL's overdue uptick in ad revenue. It's not a complete success on the sponsorship front. International display revenue and search advertising dipped during the quarter. However, Armstrong's content farm strategy of acquiring magnetic sites and emphasizing cost-efficient articles and videos is paying off -- just like it did for Yahoo! (NAS: YHOO) and Demand Media (NYS: DMD) . AOL is back, even if today's market reaction tells a different story.
What do you think AOL should do to win back investor confidence? Share your thoughts in the comment box below. Add AOL to My Watchlist to see if it's able to live up to the turnaround.
At the time thisarticle was published The Motley Fool owns shares of Google and Yahoo!. Motley Fool newsletter services have recommended buying shares of Yahoo! and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.Longtime Fool contributor Rick Munarriz wonders if AOL will ever party like it's 1999. He does not own shares in any of the companies in this story. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it's got mail.
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