How Bad Can It Get For AOL?

Tim Armstrong and Arianna Huffington of AOL barefoot

AOL stock is down almost 30%.

Its market cap is just $1.14 billion.

How low can it go?

Let’s assume what’s going on here is that investors do not believe in AOL CEO Tim Armstrong’s “media company” turnaround plan – that all they value is AOL’s subscription business.

Earthlink, an Internet access company that has turned itself into an annuity, is a decent proxy for what AOL’s subscription business could look like all on its own.

Earthlink’s marketcap is .88X revenue.

Annualized, AOL’s subscription revenues are about $800 million.  Apply the Earthlink multiple, and AOL’s subscription business contributes $700 million of market cap.

Note that this number doesn’t figure in AOL’s media business, at all. With help from a fairly sizeable brand – The Huffington Post – AOL’s display ad revenues reached $127 million this quarter – $500 million or so annualized. We think that business is growing fast enough to justify a 2X multiple. But let’s be conservative and give it a 1X.

Here’s the final maths: $500 million + $700 million = $1.2 billion.

So how much lower can AOL go? Not much before it starts to get outrageously cheap.

CORRECTION: An earlier update to this post said AOL finished down just 12% on the day, after reaching 30%. We reported that because its what Google Finance said. Google Finance was wrong.