AOL Shares Are Distressed, Baby!

 | Feb 11, 2014 | 3:12 PM EST
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It's unfortunate that Tim Armstrong made the comments about "distressed babies" in his town hall meeting with AOL (AOL) employees last week.

The comments ended up becoming front page news on USA Today, The Huffington Post (owned by AOL ironically) and "Today" on NBC. It started a firestorm of criticism, including a poignant letter from one of the mothers of the babies in question.

In the end, Armstrong did what he had to do: apologized. And, he went one better: He actually reversed himself on the decision that led to his town hall explanation in the first place and reinstituted the companywide benefits plan.

Still, there has been an overhang on the stock as a result of this whole fiasco, and it ended up clouding what had been a really nice set of results last week on the company's earnings call.

To be sure, the baby comments weren't the whole negative part of last week's earnings.

The analyst community was split on the results. Some sell-siders loved the results and upped their price targets to the high $60s or $70. Some lowered their price targets and downgraded the stock.

The ones who had a negative view thought that all the good news of a strong fourth quarter had now been priced into the stock and didn't see much upside left for 2014; they also thought that management sounded tepid about 2014 prospects.

My view is that the company had a number of excellent aspects in the results:

  • continued strong traffic growth;
  • continued performance of its key branded properties such as The Huffington Post;
  • real meaningful contribution from the recent acquisition, which is starting to look like a steal of a deal for AOL and it also seems to bode well for the recent Gravity acquisition;
  • good performance in programmatic buying;
  • strong premium video ad performance; and
  • exceptionally strong top-line growth from the brand and networks business units, which suggests that there could be more ahead in 2014.

I have always been interested in AOL as a target for Yahoo! (YHOO). I think these recent results suggest even more fodder for the logic behind why Yahoo! should buy AOL.

This overhang from the distressed baby comments masks the fact that the performance of AOL is going very well.

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