Stock Pick: AOL’s PR gaffes obscure its impressive revenues

"Distressed" fiasco is a buy opportunity

Chart showing AOL's 1-year stock performance

From a public relations perspective, AOL Inc (NYSE: AOL). had a very bad week. Tim Armstrong, the company’s CEO, came under fire after saying two women with “distressed babies” ran up the company’s health care costs, which forced him to change the way the business contributes to employee 401(k) plans. Armstrong, who has gotten in trouble for his choice of words before, was heavily criticized for making the company retirement plan less attractive and then blaming babies for the change.

What’s been lost in all of this is the company’s impressive fourth quarter results, which it also announced last week. Quarterly revenue rose 13% year-over-year, with advertising revenue climbing 23% to $507 million. Total revenue of $679 million beat analyst estimates by about $24 million, while its $0.64 earnings per share exceeded estimates by four cents.

Brian Fitzgerald, an analyst with Jefferies, was pleased with the result, writing in a February 7 report that “AOL remains one of our top small-cap picks.” He reiterated his buy rating and increased his 12-month price target from $60 to $66.

Most of the advertising revenue came from its video programming and specifically from, a video advertising technology company that it bought for $405 million in September. He thinks ad revenues can keep increasing and so can average revenue per user, which was up 4% year-over-year last quarter.

The company does have some work to do—it has to continue diversifying its revenue base away from its declining dial-up subscriber base and it has to successfully integrate its January purchase of Gravity, a company that helps personalize content and ads, but many analysts do think this venerable tech company is a good buy.

The stock is currently trading at $46—it fell slightly after the PR debacle—but the median price target is $55, according to S&P Capital IQ. If you can get past Armstrong’s gaffes, then this business is still a good bet.