There's little reason to invest long-term in AOL, Inc. (NYSE:AOL), as this former email giant now tries to reinvent itself as a media company. There aren't many believers in this new AOL. Since splitting from Time Warner (NYSE:TWX) in December 2009, AOL stock is down more than 5% while the S&P 500 has rallied nearly 22%. Having effectively abandoned email, AOL is betting all their chips on the free internet content advertising model.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Mailing it in
Despite Time Warner sprinting for the exit from their former partnership, the AOL brand name still has some value. Part of the reason AOL has had some initial success transitioning from email provider to media company is legacy email users visiting the site to log in to email accounts. Turning a profit in the third quarter of last year, AOL has been able to capture search traffic and ad revenue from old email users. AOL's shift away from email is weakening that source of search traffic.

Legions of legacy email subscribers are jumping ship for better providers who still invest in email infrastructure. In fact, AOL has been throwing the towel in for years in the email war against Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and other providers.

Rapidly dwindling legacy subscription revenues - down 23% during the fourth quarter - in addition to free account cancellations, translates into reduced traffic, ad sales and operating margins. AOL has been able to maintain the appearance of stable margins because of restructuring and sizable cost reductions. This trend may not be sustainable, as there's barely any skin left on AOL's old bones. (For related reading, see Time Warner Growing More Content.)

Legacy email users jumping ship to Gmail, Hotmail, and Y-Mail is just one factor working against AOL. Horror stories of subscribers trying to cancel free and subscription accounts has blackened AOL's customer service reputation. AOL's notoriously difficult process for cancellation is turning away old friends.

Gambling on Content
Then there is AOL's decision to spend $315 million on liberal blog site and news aggregator The Huffington Post. The Post's left-leaning political slant could tarnish AOL's intentions to be seen as an unbiased news source competing with the likes of CNN, owned by Time Warner, or conservative Fox News, run by News Corp (NASDAQ:NWSA). Shares of AOL dropped more than 3% on the day the purchase was announced.

As AOL phases out online projects - contributing to last quarter's 29% drop in advertising revenues - a lot of cash is being spent on new content assets. The expensive Huffington Post gamble follows Q4 acquisitions of Pictela, Inc. and, Inc. TechCrunch and 5min Inc. were purchased back in September.

The Bottom Line
AOL's brand moat is failing. Soon, AOL email accounts could be a thing of the past. AOL email users who have been spurned by the company are venting on internet discussion boards with vitriolic complaints against their former provider. Plus, there are still questions as to whether the free content ad model will succeed, as better companies have made the attempt and failed. (For more, see The Numbers Behind The Recent Mergers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center