Peter Kafka

Recent Posts by Peter Kafka

Here’s Why Wall Street Is Killing AOL

AOL reported its first quarter of advertising growth this morning, and the company said it was making real headway in its comeback story.

Wall Street says otherwise: AOL shares are off more than 20 percent on a day when the market is perking up, just a tiny bit – the Nasdaq is currently up 1.64 percent.

What gives? AOL CEO Tim Armstrong told analysts today that he wasn’t happy with some of the company’s results. But earlier this morning, when I told him that investors were dumping the stock, he told me a sell-off against the broad market uptick would be “hard to comprehend.”

So here’s an explainer, via Citigroup’s Mark Mahaney. The analyst didn’t lower his “hold” rating on AOL after this morning’s earnings, but he didn’t see enough to make him happy, either. We’ll use him, via the note he published today, as a rough proxy for disaffected AOL investors:

  • Revenue was more than Wall Street expected, but the bonus dollars came from AOL’s less profitable network business, not its core display business.
  • Meanwhile, that display business actually got weaker this quarter: If you pretend that AOL owned TechCrunch and HuffingtonPost a year ago (i.e. “pro forma results”), then display ad sales would have increased 9 percent this quarter, down from 12 percent in Q1.
  • Those display dollars may have been at risk even before we were facing Maybe Recession 2.0, or whatever we’re going to call it: The company “noted significant weakness in June & July.”
  • Earnings are shrinking: “EBITDA declined over 60%+ Y/Y vs. downapprox 57% Y/Y in Q1; this marks one of the biggest declines we’ve seen in years.”
  • And earnings will continue to shrink in the near-term: The company lowered its EBITDA guidance for the rest of the year.

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