Event: Internet pioneer AOL (AOL) reported earnings for the quarter ending Sept. 30 on Tuesday before the market open. AOL said it earned 22 cents per share in the quarter. Analysts on average were expecting a profit of 17 cent per share. AOL also exceeded estimates on the top line. Sales in the quarter were $531.7 million versus an estimate of $521.6 million. AOL’s strong showing was due to gains in advertising revenue, while its subscription business continued to deteriorate albeit at lower rate of decline than previous quarters. Shares of AOL jumped on the news and are trading nearly 10% higher in early trading on Tuesday.
Analysis: It should be no surprise that AOL’s advertising revenues are climbing. As a source of news and content, the site is very popular during what is sure to be a tight election. Spending by candidates has been of epic proportions. Are the revenues sustainable at AOL? I would be highly suspicious. Yes, AOL itself appears to have stabilized as a business model, but one that may have reached a peak. This blow-off rally should be sold into. Where are future profits coming from? Can advertising alone carry the freight? I think not. Look for AOL to give up these gains and perhaps more over the next 3-6 months.
Action: AOL is setting up for a nice extended put-buying opportunity. Look to own a slightly out-of-the-money put with a long dated expiration of 3-6 months.
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