AOL: A Blast From the Past

 | Dec 26, 2013 | 11:00 AM EST
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Does anyone think about AOL (AOL) anymore? I guess somebody must think about it, because the stock is up 47% year to date. I haven't followed AOL since the day it merged with Time Warner. But I decided to take a look at it because of the strong stock performance. There must be something there. 

Last month, AOL reported better-than-expected third-quarter revenue. Revenue grew 6% year over year, thanks to a stronger advertising market. Global display advertising revenue rose 5%, while search revenue increased 3%.

When you take out the acquisition, the results were less impressive. Instead of 6% revenue growth, the top-line grew only 2.3%. But could turn out to be a good acquisition. revenue grew 17%, to $17.6 million.

AOL has aggressively invested in something called AOL On, which is an online television network. AOL On is making original programming that is fun and engaging. Traffic is building as video clips get passed around through social networks. In the second quarter, the number of advertisers AOL is working with increased 20%. Revenue from ad agencies has increased by double digits. Over the next few quarters, this new interest from ad agencies could really begin to boost the top line.

Video is driving growth in AOL's unique-user numbers. Last quarter, unique users grew 4%, the fifth consecutive quarter of year-over-year growth. All advertising grew for the third sequential quarter.

For fiscal 2013, Wall Street is projecting revenue growth of just 4.78% to $2.296 billion. But the Street says the ad business can dramatically improve over the next year. For 2014, analysts expect 9.8% growth. If they are right, AOL shares could go higher. Because AOL remains a work in progress, the bottom line is plagued with lots of restructuring charges. Revenue growth and not earnings per share will drive the stock higher.

I think AOL can go higher simply because it is under-owned in the growth-stock community. There have been a lot of skeptics, and if the company can turn those investors into buyers, the stock should easily hit the mid-$50s sometime next year. If AOL can achieve its 2014 estimates, then 2015 numbers look low. In 2014, I believe you can make money with a blast from the past.

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