AOL Needs Some Profitable Growth

 | Jul 08, 2014 | 2:30 PM EDT  | Comments
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After the last earning's call in the spring, AOL's (AOL) stock took a dive. It dropped to the low $30s from the low $40s, as investors worried about where future profits from AOL were going to come from.

Tim Armstrong has led AOL on the comeback trail after its stock initially bombed following its IPO a few years back. The stock got as low at $10 at its worst moment when, coincidentally, TechCrunch's Michael Arrington had a very public split with Arianna Huffington.

But Armstrong kept things steady as she goes and led the stock back to more than $50 earlier this year on news that it had rid itself of the money-losing Patch division. But since then the stock has dropped.

The question always hanging over this company is what's going to happen to it after all the people who still subscribe to its dial-up Internet service provider business eventually wise up and cancel their service? What's going to be left?

Still today, that's the only source of profit within the company. Since Armstrong's arrival as CEO he's sought to change the profile of the company by building up a collection of brands that people go back to (like TechCrunch and Huffington Post) as well as an advertising network.

In the last year, Armstrong has really zeroed in on programmatic advertising by buying companies like Adap.TV and several others to be both a demand- and supply-side provider of advertising and content. Even if you don't want to buy ads on AOL properties specifically, Armstrong wants you to buy ads through his network, which will appear elsewhere, without ever having to deal with a human.

Armstrong isn't the only one with this vision for programmatic ads. Facebook (FB) bought LiveRail last week for an undisclosed amount to go after this same idea.  Both AOL, Facebook and others are particularly interested in programmatic video ad buying because video ads are the fastest growing niche for ads and the most lucrative.

The problem for AOL has been that although there's enormous revenue growth in the programmatic space, which AOL has pointed investors to, it hasn't yet been profitable revenue growth. So, today, the whole programmatic ad investment has yet to yield real fruit.

AOL argues that this is just a matter of time and that this is where the world is heading and it has a great offering. It is correct, but its shares won't really jump until their growth starts to help bump up its EBITDA.

On the recent share drop, Armstrong personally bought $1 million worth of stock on the open market to show his confidence in the company. He already owns 6% of the shares outstanding. And the stock has slowly recovered over the last few weeks, now more than $40.

But it's not yet clear when the profit gusher of programmatic ads will really show up. Until then, AOL shares will remain at current levels.

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