Success of Project Devil Could Create 13% Upside to AOL Stock
AOL (NYSE:AOL), which competes with Yahoo (NASDAQ:YHOO) and Google (NASDAQ:GOOG) in the display advertising market, recently launched “Project Devil” to reduce visual clutter on web pages and enhance ad space functionality in order to draw higher user engagements levels. [1]
AOL intends to bridge the gap between advertisers’ messages and users’ perception. In this regard, AOL recently acquired Pictela, which provides high definition content for online advertisements and could complement the strategic initiative of Project Devil. [2]
Success of Project Devil could drive higher engagement levels, ultimately raising AOL’s recorded RPM (revenue per 1,000 ad impressions). Improvement in RPM rates would lift our $23.80 price estimate for AOL stock, which is currently in line with market price.
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Can AOL Revive its Display Advertising Business?
Since its spin-off with Time Warner (NYSE:TWX) in December 2009, AOL’s display ads revenues has declined from $126 million in Q1 2010 to $121 in Q3 2010, [3] in spite of a general revival in online advertising. [4]
AOL certainly needs to innovate in order to grow its online advertising business. Is Project Devil the answer? We estimate that AOL’s RPM rates have declined from $4.35 per 1,000 page views in 2007 to around $2.54 per 1,000 page views in 2010 in part due to the recessionary environment prevailing during 2008-2009. We believe that the advertising market revival could generate slight improvement in this metric going forward, towards $2.67 by the end of our forecast period.
If AOL succeeds in its strategic efforts to revamp the display ad business, its RPM could improve beyond our expectations. There could be an upside of around 13% to our estimate for AOL stock if RPM recovers to 2007 levels of $4.35 per 1,000 page views by the end of our forecast period.
AOL Strives to Improve Brand Advertising Content
Project Devil is a step in the right direction for AOL towards improving user advertisement engagement levels. From the user side, AOL hopes that ads will become more visually pleasing, thus drawing increased attention. For advertisers, the new format will allow for increased functionality. These ads will ultimately appear much larger and more interactive than current display ads on AOL sites. Their functionality will also permit slideshows and video in addition to feeds from social networking sites like Facebook and Twitter.
The Pictela acquisition is another piece of the puzzle towards achieving this goal, and marks AOL’s 5th acquisition in 2010 after having acquired StudioNow, 5Min Media, Thing Labs and TechCrunch. These acquisitions were primarily undertaken to strengthen AOL’s content (See How Content Acquisition Strategy Could Boost AOL Stock).
To see the impact of various RPM scenarios for AOL’s display advertising business on the company’s stock value, drag the trend line in the modifiable chart above.
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Notes:- A better web is coming, AOL [↩]
- AOL acquired Pictela, AOL press release, December 2010 [↩]
- According to the company’s 10-Q forms [↩]
- According to a report by Interactive Advertising Bureau and PricewaterhouseCoopers, online advertising revenues in the U.S. rose 11% to $12.1 billion in the first half of 2010, compared to the same period in 2009 [↩]