AOL’s Resurrection

AOL (NYSE: AOL) will release its earnings on May 12. No matter how well they match or fail to match consensus estimates, the company looks nothing like it did a quarter ago. AOL has begun the renaissance promised two years ago, and again for 2012. The transformation happened suddenly, unexpectedly and more quickly than most experts would have imagined.

The most obvious signs of the AOL change are the Pulitzer Prize won by The Huffington Post and the sale of 800 patents and some patent licenses to Microsoft (NASDAQ: MSFT) for $1.06 billion. Microsoft already has sold some of those patents to Facebook for $550 million. It is assumed that the social network will use them in part to batter Yahoo! (NASDAQ: YHOO) in the growing intellectual property war between them. No matter what the eventual fate of the patents is, AOL got more money for them than expected.

There is a temptation to say that AOL’s stock price has gotten ahead of itself. Shares trade at nearly $25, which is close to its high since the company relisted as a standalone public company. And the price is well more than twice its 52-week low of $10.06. Analysts continue to make the point that AOL’s primary business — its display ad operation — is slow-growing and losses money. Its ISP business, which is profitable, continues to shrink. AOL’s revenue is expected to fall almost 5% in the quarter that just ended to $526 million. Quarterly EPS for the period are expected to rise from $0.04 a year ago to $0.10 this. Investors will be particularly sensitive to whether advertising actually fell in the quarter just ended. Rival Yahoo! faces a similar problem. Social network Facebook as sucked up a great deal of display inventory, at the expense of the market share of the portal companies. Facebook’s quarterly earnings show it continues to gain revenue quickly in the display business.

AOL has promised to return much of the $1 billion it got from Microsoft to shareholders. It is not clear whether that will be in the form of a dividend, a one-time special dividend, or share buybacks. Once the money is paid, the predominant theory is that AOL shares will fall again. Quarterly numbers will also press shares up or down.

Whatever happens in the next several months, AOL is on the move in a way it has not been since it became public again. That, in and of itself, is stunning given the years of skepticism it has faced.

Douglas A. McIntyre