I'm a fan of recycling, but I'm not eco-friendly when it comes to this weekly column. Every week, I pick a stock to throw out. However, this week I'll toss out a company that already got the heave-ho earlier this year.
I'm an optimistic pessimist, though. I may rip into a stock every week, but I come right back with three more picks that I think will be better.
Who gets tossed out this week? Come on down, AOL
You've got failwhale
"AOL continues to make progress against our long-term objective of becoming an Internet growth company," CEO Tim Armstrong says in this morning's first-quarter report.
Maybe I'm using a different dictionary in defining progress and growth, but I'm left scratching my head. Let's go over AOL's three revenue categories over the past year:
- It made $354.3 million from advertising, down 19% compared with a year ago.
- It made $282.7 million from subscriptions, down 28%.
- And other revenue was $27.3 million, down 11%.
Where's the progress in this backward stampede? AOL has made necessary inroads in slashing costs, but it hasn't been enough to offset the negatives from the backpedaling of its scalable business. AOL's profit of $0.32 a share is 59% below where it was a year ago. Free cash flow took a 55% hit.
So let's sum it up. AOL is a business with sinking ad revenue and a diminishing pool of paying subscribers, and it's hacking away at its cost structure. This doesn't sound to me like an Internet growth company. No, those numbers are rubbing elbows with the fading print media industry.
Where's the growth? I'm a fan of Armstrong, but I don't know whether even he can plug the holes in this once-shiny ocean liner quickly enough to avoid its fate as coral-reef fodder.
Losing access subscribers is old hat for AOL. It's down to fewer than 4.7 million premium users, short of the 6.3 million on its rolls a year earlier and well below the 26.7 million subscribers it watched over when it peaked eight years ago. The plan was to make it up in advertising, but that requires relevancy and stickiness. Unfortunately for AOL, we're living in a Facebook world. A plan that seemed reasonable when it was hatched five years ago is flat-out flawed today.
Analysts see AOL's earnings falling to $2.61 a share this year and $2.21 a share come 2011, but this was before this morning. Those figures are likely to be revised even lower now.
Progress? Growth? Doubt.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over them.
(Nasdaq: YHOO): AOL and Yahoo! are often locked up in the same shareholder cell, but at least one of them is making a great escape. Yahoo! posted a 20% increase in display advertising during the same quarter, and its adjusted profitability nearly doubled. Yahoo! may be taking a step back with its fee-based revenue, and handing over the meatiest parts of its search business to Microsoft (Nasdaq: MSFT)will cost it in the long run, but at least it's growing in its bread-and-butter display business.
(Nasdaq: GOOG): Big G overpaid for a 5% stake in AOL that it recently unloaded, but we all make mistakes. Google makes plenty of blunders, actually. Between distribution channel setbacks on its Nexus One and handing gobs of market share in China to Baidu (Nasdaq: BIDU)after its karma-rewarding retreat, the world's leading search engine isn't perfect. However, it has still been able to grow during the darkest stretches of this global recession. One can only imagine how well Big G will do once the economy is running on all cylinders. Revenue before traffic acquisition costs rose 24% in its latest quarter, with non-GAAP earnings growing even more.
(NYSE: TWX): I have been lukewarm on Time Warner, and I actually appreciated December's spinoff of AOL as an opportunity to get back into America Online. But now, AOL is stuck in reverse, while Time Warner continues to bounce back. After it earned $1.78 a share last year, the pros foresee a profit of $2.15 a share in 2010, and $2.44 a share in 2011. AOL may be trading at a cheaper earnings multiple than Time Warner and fellow spinoff Time Warner Cable (NYSE: TWC), but AOL is the only one projected to post declining profitability over these next two years.
Sorry, AOL. I will remain one of the waning subscribers, and cheer on Armstrong's efforts, but I'll sit AOL out as an investment.
Microsoft is a Motley Fool Inside Value selection. Baidu and Google are Motley Fool Rule Breakers picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services free for 30 days.
Longtime Fool contributor Rick Munarriz always takes out the garbage. He does not own shares in any of the stocks in this column. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
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