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This Internet 'Dinosaur' Is Reinventing Itself -- Is It Time To Buy?


Change is the only constant in the world.

This is particularly true when it comes to the Internet. It was only in 1989 when the first commercial dial-up Internet service provider (ISP) was launched. Few realized that this ISP, named The World, would spark a radical global revolution.

Visionary companies jumped on board as the public started using the Internet as a means of shopping, information and entertainment. Many companies took to the stock markets to raise capital for a foray into the Internet frontier. If your company name included "dot-com," investment banks were probably clamoring to take it public. Companies that were little more than an idea and some rented office space were able to raise millions quickly and easily.

Not since the Dutch tulip mania of the 1600s had the world seen such an investment frenzy, but the vast majority of these companies failed to gain traction after the initial hype. Names like Webvan, eToys.com, Flooz.com and Kozmo.com, plus hundreds of others, have been relegated to the dustbin of history despite massive funding and the leadership of aggressive, intelligent entrepreneurs. Many of these firms were simply before their time, as consumers and businesses just weren't ready to use the products and services offered.

The Internet craze cumulated in the bursting of the dot-com bubble in 2000. Billions of dollars were lost by investors and the first wave of Internet companies. Most folded, never to be heard from again -- but a few survived the debacle and are with us to this day.

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One of these dinosaur companies is among the earliest ISPs. Promoting itself with the relentless mailing of disks offering free Internet access trials, this company was soon part of the largest corporate merger in history.

This dinosaur, of course, is none other than AOL (NYSE: AOL).

This iconic ISP launched its IPO in 1992 at $11.50. Shares rocketed more than 680% by 1999, and after a series of acquisitions, old-school media empire Time Warner (NYSE: TWX) agreed to merge with AOL, creating the biggest media company on the planet.

Since that time, the company has struggled to find its footing. By 2003, shares of AOL Time Warner closed at just $15, and AOL now seems torn between its role as a once-leading Internet portal and its current role as a media company.

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A decade later, AOL is still struggling, but the future looks bright for investors. Although net income plummeted 90% in the third quarter from a year ago, revenue increased 6%, to more than $560 million. The drop in net income was due to a write-down of AOL's troubled local news segment, Patch. AOL's shares could continue to climb higher if the company focuses on its primary competencies and cuts costs rather than throwing good money into ill-suited ventures.  

One of the primary reasons for my optimism is the growth of real-time bidding and digital display advertising. Spending on automated ads is forecast to grow nearly 74% to more than $3.3 billion this year, according to eMarketer. AOL has an AdTech unit that specializes in targeting high-end, cutting-edge digital advertisers. It is this market that will serve as the catalyst to improve AOL's bottom line. The company recently launched a sell-side platform called Marketplace, which helps advertisers maximize their value. AOL has positioned itself to capture this next wave of advertising revenue.

A look at the technical picture shows shares have spiked from a low in the $33 range in mid-October to a high just above $43 before recently hitting resistance.

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Risks to Consider: Despite the recent upswing, AOL is still struggling. Massive cost cutting is needed to keep the company on track for increased profits. Always use stop-loss orders and diversify when investing.

Action to Take --> I am a firm believer in the future of digital display advertising and real-time buying platforms. AOL is positioned to capture a share of this rapidly growing market. Buying on a breakout close above $43 with an 18-month target price of $65 and a $38 initial stop level makes solid technical and fundamental sense right now.

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