Dramatic stock-price movements after an earnings announcement aren't shocking. Earnings season is chock-full of examples of the market reacting -- and then overreacting -- to earnings results. With that said, the 15% pop in AOL (NYS: AOL) share price after announcing 2012 Q3 results isn't overly surprising. It happens.
What makes AOL's Q3 intriguing for growth investors is how CEO Tim Armstrong and team generated advertising revenues that were the best in seven years. And how AOL cranked out a 27% jump in free cash flow, and will reduce outstanding shares by 30% in the immediate future.
AOL has made no secret of its desire to become a king of content. New Yahoo! (NAS: YHOO) CEO Marissa Mayer is on the same page. Content leads to advertising revenue, and in AOL's case, the 7% increase in sales in this key area led the way to total revenues of $531.7 million in Q3, mirroring 2011 results.
The $340 million in ad revenue overcame a 10% drop in subscription sales, and 18% drop in "other revenues." However, the decline in other revenues is an accounting change, primarily for mobile users that occurred in Q3 of 2011 and still impacts results.
The content, including AOL's Huffington Post and the video-rich On Network, was the catalyst for AOL's $0.22 a share in net earnings in Q3. The On Network is now the second-most-viewed video site on the Internet, and even more important, AOL was able to translate the growth in users to a double-digit improvement in revenue compared to Q3 of 2011.
The increase of nearly 12 million users visiting AOL's Patch Network was a 19% increase over last year, leading more advertisers to participate in the Project Devil ads, a premium service AOL offers its customers. The premium ads, along with the trend toward repeat usage, led to AOL's improved reserved inventory pricing year over year. Generating consistent revenue in the often-fluctuating advertising industry, online or not, is a noble pursuit and an area of improvement with AOL.
The transformation of AOL from an old school dial-up Internet connection provider to a leading online provider of content isn't complete -- not by any stretch. But the strides AOL has made are dramatic, and haven't gone unnoticed by investors. AOL has provided shareholders with a 160% gain in the past year: That's more than twice Google, Yahoo! and market darling Apple, combined.
At just under $4 billion in market cap, AOL is a long way from making the kind of impact on global Internet usage as $225 billion Google, or even Yahoo with its site visitors and valuation of $20.65 billion. But for growth investors, AOL remains an intriguing opportunity, even after that ridiculously high stock appreciation the past 12 months.
With a trailing earnings ratio under 4, and price -to-sales ratio of 1.5, AOL remains a solid growth alternative relative to its industry. Clearly, Google and its varied revenue streams and business lines warrants a significantly higher relative valuation than AOL (it's earned it). Yahoo! and AOL, on the other hand, in many ways are heading in the same direction. Mayer is working on creating top-down stability at Yahoo!, getting the team focused on what they do best: generating ad revenue.
The difference between Yahoo! and AOL is this: Even at its smaller size, AOL is further along in the effort to redefine itself, although to be fair, it also began down that path earlier. No matter what, the Nov. 6 earnings announcement proves big things could lie in store of AOL and Yahoo!.
The article Is AOL's Content Strategy Starting to Pay Off? originally appeared on Fool.com.
Fool contributor Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google and Yahoo!. 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.