AOL Tries to Re-Invent Itself

06/16/2010 12:30 pm EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says the once-formidable online service and Web portal is testing a new strategy in a challenging environment.

[A recent] article in Fortune (“AOL Struggles for Ads During Overhaul,” June 9th) takes a look back at AOL's (NYSE: AOL) progress over the past year.

As Fortune reports: "AOL was coming back with a vengeance, brand-new AOL [chief executive officer] Tim Armstrong told Fortune's 2009 Brainstorm Tech conference last year. At the time of the 2009 conference, the CEO was fresh out of the starting gate, and had just done a 100-day 'listening tour,' checking in with AOL's global workforce. He was pumped, and ready to shake up the brand."

Armstrong explained to the conference that he was aiming to do for online content what Google (Nasdaq: GOOG) did for online advertising. "That is, build a thorough, targeted delivery method from the ground up," he stated.

Unfortunately, advertising revenue dropped 19% to $354.3 million, according to AOL's first-quarter earnings report. The company's profits were $34.7 million, down from $82.7 million last year.

As it stands, the article concludes, the firm still has a long way to go before it can complete the redesign of its look and change its reputation among Internet users.

Despite the company's fundamental struggles, options players remain optimistic. The International Securities Exchange (ISE) has reported 11 calls purchased to open for every one put purchased to open during [recent] trading sessions. This ratio of calls to puts is higher than 86.5% of all those taken during the past year. [Also], call open interest doubles put open interest among options slated to expire in less than three months.

What's more, short sellers have started to unload their bearish bets, as the number of AOL shares sold short dropped by 17% during the past month to 6.8 million. This accumulation of bearish bets accounts for 6.5% of the company's total float. Despite the buying pressure, this repurchase of shorted shares did little to boost the security.

Technically speaking, the shares of AOL are down more than 7% since the beginning of 2010. The stock has drifted lower under its ten-day and 20-day moving averages since it reached a peak near $29.50 in April. (It closed at $21.64 Tuesday—Editor.) Should the security continue on this downward trajectory, it could shake loose the remaining bulls, pushing the stock lower.

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