AOL (AOL) has had a rough outlook for some time, long before Tim Armstrong made insensitive comments about “distressed babies.”
Just look around digital media and you’ll see the same story everywhere — lower ad rates offsetting any growth in traffic. Key AOL competitors Google (GOOG) and Yahoo (YHOO) both showed this in recent earnings as GOOG said its “cost per click” rate declined 11%, and Yahoo’s rate was down 3%.
Adding fuel to the fire for AOL is that its legacy dial-up business is slowly going the way of the dodo and online display advertising is in a secular decline.
Yet miraculously, CEO Tim Armstrong has orchestrated a stunning run for AOL stock in the past few years. Shares are up four-fold from under $12 in the middle of 2011 to about $46 right now.
So what gives, if things have been so ugly for online display ad rates and there are continued declines in AOL Internet subscriptions?
Well, it’s nothing Tim Armstrong has done, that’s for sure.
AOL Stock Up … But Not on Armstrong Leadership
The simple reason for the run in AOL stock lately — including a roughly 60% run in calendar 2013 — can be summed up in three simple charts from the AOL earnings reported last week.
And none of them have anything to do with innovation, leadership or building a sustainable future for AOL stock and its core online ads business.
Click to Enlarge Cost Cutting: AOL has slashed and burned deeply since the Great Recession and its 2009 spinoff from Time Warner (TWX). Sure, the company will tout all its growth in unique visitors and its 2011 acquisition of Huffington Post as big reasons to be optimistic. But slashing costs and employees has undoubtedly played a huge role in increased profitability. Sorry, Tim, but layoffs aren’t exactly innovative leadership.
Click to Enlarge Stock Buybacks: AOL stock has also seen an earnings bump thanks to the glorious financial engineering known as stock buybacks. You see, Wall Street’s favorite profit metric is “earnings per share.” That is, profits divided by shares outstanding in a company. Well, if you can’t increase the numerator in that equation (the profits) you can always decrease the denominator (shares) … and magically, this figure moves higher! Note that Armstrong has sucked up 25% of all outstanding AOL stock since its December 2009 spinoff from Time Warner. So by simply virtue of the earnings-per-share calculations, profits were given a 25% bump on paper even if the actual numbers went nowhere. The 2012 sale of patents to Microsoft (MSFT) for $1.1 billion was largely earmarked for AOL stock buybacks, for instance, and it’s no surprise the stock broke out around that news.
Click to Enlarge Subscriber Bleed has Slowed: To top it off, the biggest reason to be bearish on AOL stock — namely, the death of slow dial-up Internet in a broadband and mobile age — hasn’t turned out to be as urgent a problem as originally thought. Consider that three or four years ago, the quarterly decline in users was more than 30% … but now, the pace of declines has slowed to 10% or so each quarter. That’s probably because those of us who wanted to abandon AOL dial-up long ago have done so… while plenty of older folks who either don’t care (or perhaps don’t even know they are still subscribed?) haven’t switched and probably won’t. It’s still going to disappear eventually, but for the time being, AOL’s subscriber base seems to be much more stable than feared a few years back.
So there you have it.
It’s not that Tim Armstrong has had any special leadership skills. The capitulation on his personal brainchild, Patch, should be proof positive of that.
Sure, the HuffPo buyout juiced user metrics and pageviews. And sure, the sale of patents to MSFT helped scrounge up some cash for buybacks.
But the biggest pluses for AOL stock owners have been from inefficiencies, buyback-inflated earnings metrics and the slow (but continuous) decline of its dial-up business in the face of more urgent fears.
Tim Armstrong certainly doesn’t have an easy job. As a guy who works in digital media, I know that too well. And to his credit, the revenue declines at AOL have finally seemed to end in 2013 as the company posted
But hey, many folks could easily do the same job for $12 million. Just reduce headcount, execute buybacks and relax.
Perhaps Tim Armstrong should be applauded for being cold and logical enough to just cut costs and buy back AOL stock, then getting out of the way.
Of course, I would be afraid what comes next after those easy gains are used up. What Tim Armstrong does from here is going to be the real testament to whether he’s worth his paycheck … or just another slash-and-burn CEO who juices numbers in the short term without ever leading his company to lasting success.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.