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Don’t laugh: The surprising reason AOL could rise 60%

Lawrence Lewitinn
Talking Numbers

Could one of the hottest companies in the Internet sector be …  America Online?

It’s a serious question.

Since early May, shares of the company synonymous with yesteryear’s dial-up Internet are 25 percent higher. And while AOL’s stock is still down 6 percent on the year, it has more than tripled over the last three years.

So is this a “dead cat bounce,” or is AOL the Internet’s best comeback story yet?

James Cakmak, senior research analyst at Telsey Advisory Group, says the company is reinventing itself and transitioning from a value story to a growth story. He considers AOL one of his top picks, and gives it a price target of $70 per share. That’s 60 percent above where the stock was trading on Wednesday afternoon.

“This is not your grandmother’s AOL,” Cakmak said. “That’s the bottom line.”

While AOL still made $155 million in the last quarter off of subscriber revenue, he doesn’t see this legacy component as the future of the company.

“A bet on AOL is really a bet on the future of advertising,” explained Cakmak. “The space is a transition from a traditional ad sales method to programmatic deliver. What does that mean? That means data-driven targeted ad delivery where you are getting in front of the right user at the right time at the right moment on a geotargeted basis. And they’ve built, over the last couple of years, this platform to facilitate just that.”

While AOL has been building its digital ad platform—called ONE by AOL and set to launch in late 2014—it has also expanded its video advertising business, Cakmak said. “That’s one of the fastest-growing areas of the Internet,” he said. “The company is a leader in being able to deliver video advertising across the Internet. And that’s really where the future of AOL is going.”

But not everyone is a fan of AOL. Richard Ross, global technical strategist at Auerbach Grayson, says the charts are negative on the stock.

“You have to take advantage of this recent surge to take profits if you have them,” said Ross, a “Talking Numbers” contributor. “I would not be a buyer here on the stock. I would not chase it on this rally.”

While AOL recently broke above its 50-day moving average as well as a downtrend it was trading in earlier this year, Ross believes the stock has gone as far as it can go for now.

“The bad news is we’ve run right into resistance at the $45 level,” Ross said. “I would not be a buyer into that resistance. In fact, I would be a better buyer on a breakout above $45. Absent that, stay away from this name right here. I don’t like it. I would not chase it. “

To see the full discussion on America Online, with Cakmak on the fundamentals and Ross on the technicals, watch the above video.