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Making the Value Case for Armstrong's AOL

NEW YORK (TheStreet) -- After quadrupling in price from $10 in August 2011 to more than $40 in May, investors seem to have gone asleep on AOL (AOL), again.

It required a mention by Jim Cramer on an Oct. 18 edition of "Mad Monday" to remind investors that AOL is still very much alive and kicking -- and was at that time trading in the low $30s. The stock jumped 3.1% the following Monday.

There was also an interesting blog post from Nyonnais around the same time on why he had taken a large long position in AOL recently.

Cramer argued that the stock is too cheap and the assets are too good to be ignored. Buying the shares gives you the growth potential of Huffington Post and TechCrunch as well as AOL's many various video properties, which actually serve up more video ads than YouTube. Those are the most exciting aspects of the portfolio even though most observers only pay attention to Patch and the dial-up business.

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You get all these for a market cap of $2.8 billion. This for a company that generated net income of $500 million in the past year. This means you're getting the business for an Enterprise Value to EBITDA ratio of less than 5 times. In the meantime, the industry average is closer to 11 times and so-called sexy stocks such as LinkedIn (LNKD)are closer to 35 times.

Even if you sold off the various acquisitions that AOL has made over Tim Armstrong's tenure, you get to a much higher number than the company's current market cap.

Nyonnais, a value/event-driven investor blogger from Switzerland, is making his bet not so much based on price but on AOL's strategic value to a buyer like Yahoo! (YHOO - Get Report).

He argues that the dial-up business, which is still generating $500 million a year in cash flows, should be worth $1 billion in a wind down scenario. So you're really getting the Internet properties for $1.5 billion and that's attractive for Yahoo!.

Nyonnais argues that the brands part of AOL can bring in $800 million in revenue next year, while its third-party network can generate $700 million next year. That's $1.5 billion in revenue from a company that's being valued at $1.5 billion today (less the dial-up business).

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