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You've got fail! AOL down nearly 10%

May 8, 2013: 11:58 AM ET
Running to stand still? AOL's online ad business is growing. But the old Internet access business is still a drag on sales growth.

Running to stand still? AOL's online ad business is growing. But the old Internet access business is still a drag on sales growth.

AOL is learning the hard way that it's not easy to live up to Wall Street's hype.

Even though AOL (AOL) reported a 23% jump in net income for the first quarter thanks to solid growth in both display and search online advertising, shares tumbled nearly 10% on the news. AOL's profits missed forecasts and investors were also hoping for better overall revenue growth than the measly 2% year-over-year increase that the company put up.

Shares of AOL have been on a tear for the past year. So expectations have increased. That's what happens with momentum stocks.

To be fair, AOL has done a phenomenal job of getting back on track since it was spun off from CNNMoney owner Time Warner (TWX) in late 2009. CEO Tim Armstrong, who joined AOL from Google (GOOG) in 2009 before the AOL public offering, has helped steer AOL away from the dying Internet access business and into the more lucrative world of online content. In addition to the namesake AOL site, the company owns The Huffington Post and hyperlocal news site Patch.

But AOL hasn't completely shed its You've Got Mail legacy business. Revenue from subscriptions still account for nearly a third of overall sales. And subscription revenue tumbled 9% in the quarter.

With that in mind, traders on StockTwits were wondering whether the AOL sell-off is justified or an overreaction. Many seemed to think it's the former.

earningstrading
$AOL this could continue down..

freeplay
$AOL anyone think this dog can go up a bit today?

InvestorWand
$AOL losing ground after Q1 miss--surprised to see so many BUY recommendations for $AOL: http://stks.co/qBit

I agree. Even though AOL has done an admirable job of becoming a leader in online media, the stock price already reflects that. Shares, even after today's drubbing, trade at 23 times 2013 earnings estimates. That's a higher valuation than Google and Yahoo (YHOO).

TrendHunter
$AOL if entered late, and proven wrong, stop being wrong and getting more wrong. wait monitor, there are other plays.

Very good point. With AOL having nearly quadrupled from its post-IPO low of about $10 in mid-2011, it seems as if the easy money has been made.

AOL is still a turnaround story. Now Armstrong has to prove that AOL can get advertising revenue to grow at such a strong pace that it more than overshadows the continued sales declines in the old AOL Internet access business. The company is not there yet.

Another trader noted that trying to guess what companies are going to do after earnings is a huge risk, especially with a stock that's hot. Sometimes it's best to sell before the results and avoid the noise afterwards.

NextTrade1122
should have been out of $SODA yesterday, ER are crap shoot, look at $AOL as well

Exactly. Home carbonated beverage maker SodaStream (SODA) also sold off Wednesday despite strong results. I did today's Buzz video on that.

Both companies reported results that are promising. Long-term investors should be encouraged and satisfied. But traders are a different animal.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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