AOL Revenues Will Be Down For The 16th Consecutive Quarter

AOL CEO Tim Armstrong with traders at the New York Stock Exchange

(AOL) reports Q4 earnings tomorrow; Citi analyst Mark Mahaney isn’t very excited.

Mark’s reiterated a “hold” on AOL, with a $29 price target.

He writes that AOL’s gross revenues will be down for the 16th consecutive quarter, “down 19% Y/Y vs. down 23% Y/Y in Q3 and down  23% in H1:09.”

Mark broke out AOL’s pros and cons.

Positives:

  • Significant Internet Advertising secular growth opportunity;
  • Focus on the $10B+ Local ‘Net Ad opportunity is differentiated;
  • AOL still remains a top 5 U.S. Internet property in terms of users;
  • Solid balance sheet with $100MM in net cash & generates $100MM in FCF per qtr;
  • At approx 3.5X ’10 EV/EBITDA, valuation is the lowest of any Mid/Large Cap Internet Stock.

Negatives:

  • Clearly deteriorating fundamentals, with EBITDA  down approximately 30% in ’09
  • Broad and sig. market share losses – in terms of basic Internet usage, Display Advertising revenue, and Search queries
  • A significant profit hole from the structural decline of its Subscriber business
  • Substantial competitive risk;
  • An unproven (@ AOL) management team. We would pick YHOO as our Value Buy.

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