AOL: Is This an Under-the-Radar Investment Opportunity?

Twitter, Yelp, and AOL all responded to earnings on Thursday, and while being the least covered, the latter might present investors with the best investment.

Feb 10, 2014 at 6:00PM

Yelp (NYSE:YELP) and Twitter (NYSE:TWTR) dominated technology headlines last Thursday after reporting earnings, so AOL's (NYSE:AOL) quarterly report flew under the radar. While Yelp and Twitter's growth may be more impressive, AOL's total investment package might be more inviting to shareholders. 

Does this loss present an opportunity?
Earnings announcements from Yelp and Twitter were two of the most anticipated releases of the week. The results sparked completely different reactions -- Yelp increased by nearly 20% and Twitter decreased by more than 20%. Investors are now racing to determine if either company presents a good investment opportunity.

Interestingly, Twitter beat expectations. In fact, the company even posted a net profit. Twitter saw revenue growth accelerate from 105% in the third quarter to 116% in the fourth, not to mention that Twitter's revenue per 1,000 timeline views rose 76% year-over-year to $1.49.

Twitter performed very well, but the problem is when a stock is priced for perfection, it must meet and exceed every expectation on all metrics. Hence, investors are alarmed at the fact that Twitter's timeline views fell 7% quarter-over-quarter, and that its 241 million monthly active users was only a 4% increase over the prior quarter.

Increasing the number of users might be Twitter's most important focus right now, but the company is not executing in this area. As a result, with Twitter trading at more than 50 times sales, it is difficult to call it a "buy" given weakness in this major metric.

Despite gains, should you still buy?
Yelp is at the other end of the spectrum, trading with gains versus Twitter's loss.

Like Twitter, Yelp saw an acceleration in growth over the third quarter, posting a year-over-year increase of 72%. Clearly, Yelp beat expectations, but what really excited Wall Street was strong guidance, mobile growth, and sales/marketing spending that grew at a slower pace than revenue.

However, despite Yelp's gains and the fact that many are bullish following the report, this is still an expensive stock. Following the report, Yelp was trading at 21 times sales, but was still not profitable. In addition, Yelp is about half the size of Twitter (from a revenue basis), but is growing considerably slower.

With Yelp expected to grow 49% this year, and quarterly revenue of just $70 million, it's hard to imagine a scenario where Yelp fundamentally grows to support its $6 billion valuation.

You may not be watching this company, but you should
Twitter and Yelp dominate the headlines in this space, but AOL also reported earnings.

AOL share prices have been volatile following its quarterly report, initially trading higher by more than 5%, but currently down approximately 4%, even though the company's report was solid.

AOL beat both top and bottom-line expectations with revenue of $679 million, a 13.3% rise year-over-year. With AOL being significantly larger and older than Twitter or Yelp, it has both growing and lagging businesses. However, those growing segments are starting to make their mark on this company.

For one, AOL's ad revenue increased 23% year-over-year. Furthermore, its streaming business is important because AOL has a rather large collection of streaming assets. Therefore, investors were pleased to see that third-party network revenue grew 63%, meaning it's becoming a more important revenue-generating segment of this company, and might even be the next era of AOL as a company.

Final thoughts
AOL's growth of 13.3% may not compare to the likes of Twitter and Yelp, but AOL is a much larger company. In fact, who knows if Twitter or Yelp will ever grow to produce the fundamentals of AOL.

With that said, AOL trades at a bargain price of just 19 times expected full-year earnings and 1.5 times sales. Compare these metrics to the likes of Twitter and Yelp's 50 and 21 times sales, respectively, and you'll see that AOL's 13% growth is by far the best value investment opportunity.

Hence, investors might not be talking about AOL, but that doesn't mean it shouldn't be on your radar.

What if you could only pick one stock this year?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Twitter and Yelp. 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.

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