AOL Shares Surged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Internet portal operator AOL (NYS: AOL) jumped for joy today, rising as much as 13.4% on pretty average trading volume.

So what: Sales fell 6% year over year in the just-reported third quarter, while the year-ago earnings swung to a small loss and free cash flows were cut in half. As terrible as it sounds when I say it like that, the quarter trumped analyst estimates on both the top and bottom lines, and CEO Tim Armstrong says that he's got a little turnaround going on.

Now what: AOL is in the process of replacing subscription revenues for its services with rising ad sales. Wait a minute -- weren't we all supposed to do the exact opposite of that after the dot-com bomb blew up ad-reliant business models left and right?

Well, I guess it works until it doesn't. Viewed through more rose-tinted lenses, this was AOL's smallest revenue drop in five years, and Armstrong is putting $250 million of his money where his mouth is via a brand-new share buyback program.

Even after this sudden jump, AOL shares have fallen 41% over the last year. Eternally range-boundGoogle (NAS: GOOG) and sputtering Yahoo! (NAS: YHOO) are both absolutely crushing AOL's share returns. Maybe a Yahoo!-AOL merger wouldn't be so crazy after all, if AOL's newfound advertising strength could get in front of Yahoo!'s much larger audience.

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At the time thisarticle was published Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned. The Motley Fool owns shares of Google and Yahoo!. Motley Fool newsletter services have recommended buying shares of Google and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

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