AOL Financial Analysis

AOL Inc is a multinational media corporation based in the United States. The business engages in the development of websites as well as investing in startup websites. The scope of AOL’s business is very broad as they focus on the electronic distribution of web content, services, and products that target ad agencies, publishers, and individual consumers. AOL is most popular for the development of the software program that allows users to gain access to its online community and then branch out into the World Wide Web.

The industry that AOL operates is the computer programming services and data processing sector. The SIC code for the industry is 7370. Competition in this industry has grown over the previous years with many high profile corporations such as Google, Yahoo, Facebook, Linkedin, Autobytel, and Red Hat. AOL is the second largest internet content provider according to sales.

In order to rank AOL versus the competition in the industry, an analyst can select a competitor and conduct a financial analysis. Autobytel is a company is operating in the same industry as AOL. Autobytel is a much smaller company in terms of market capitalization. In addition, Autobytel is a new company to the industry in relation to AOL. Table 1 shows the financial analysis of Autobytel using several key ratios. Autobytel has a very health gross margin at over 36%; however, the balance sheet is indicative of a startup company and this harbors risk for investors. Autobytel carries a heavy debt load on its balance sheet that creates unhealthy debt to equity and debt to asset ratios. This is a long term concern. In the short run, Autobytel has more than enough cash on hand to settle current debts. Special attention should therefore be given to long term debt graduation and ensuring enough cash is on hand for the maturity. Lastly, the company is highly overvalued as indicated by the P/E ratio of over 103.

AOL’s financial ratios represent a more mature organization with far less investor exuberance. For a mature company, AOL’s gross margin is health at over 27%. The debt levels held on AOL’s balance sheet are far more attractive than Autobytel, but it should also be highlighted again that the companies are at different stages in organizational development. Investors would like for AOL to have a tad more cash on hand for short term liquidity, but this isn’t much of a concern. The P/E ratio of AOL is very low at just over 4. This indicates that the investor base doesn’t expect high levels of future growth from AOL.

Autobytel and AOL have vastly different investor profiles. Autobytel is a new company carrying high levels of debt and a stock price that has been pushed far too high for a smart long term investor. Autobytel’s financial ratio profile is fertile ground for day trading or the prospect investor’s ride-up-and-dump-strategy. The company’s stock price shows that the investment is highly overvalued and will eventually have to correct itself over the long run. A P/E of over 100 isn’t sustainable over the long run. The recommendation for the average investor towards Autobytel is to sell this stock if you own it and stay away from it over the short run as a correction will likely occur. AOL is also another stock to stay away from for different reasons. AOL has exhausted its historic competitive advantage and has little chance of gaining it back from the industry giants Yahoo and Google. Earnings projections are sluggish and this indicates an erosion of future sales revenues. This is the primary reason why AOL’s P/E ratio is so low at 4.

(Table 1 omitted for preview. Available via download)