The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



) --



efforts to streamline and consolidate its businesses have translated into revenue gains for its global advertising business for the first time since 2008.

But the company's

second-quarter financial results

, released Tuesday, still contained plenty of concerns for investors, enough to cause shares to plummet 40%-plus.

AOL competes with other search and display ad giants such as


(GOOG) - Get Alphabet Inc. Class C Report






but is losing ground to these players on most metrics.

We have

a revised price estimate

of $14 for AOL shares, which is about 25% above the current market price.

We have downgraded our estimates considerably, mainly because of concerns about AOL's reduced gross margin for 2011, which affected our profitability estimates. The revised price also reflects changes to the company's net cash/debt position.

New Products & Acquisitions Should Drive Display Ad Growth

AOL's recent acquisitions such as

The Huffington Post

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and its third-party initiatives such as the Editions Magazine App should help display ads constitute a larger share of AOL's revenue as the company's search and subscription businesses get eaten up by competition.

The company's 16% year-over-year growth in U.S. display revenues for the second quarter is directly related to higher traffic and page views acquired through

The Huffington Post

, which recently surpassed

The New York Times

in monthly unique visitors.

Strategic acquisitions such as

The Huffington Post



should continue to drive traffic to AOL sites.


AOL's Project Devil

metrics have been encouraging, with AOL seeing 6.4 times higher engagement through Project Devil ads as compared to standard ones.

Profitability Is a Concern

Despite the display ad growth, reaching profitability can still be a lingering concern for AOL.

Gross margins for AOL (excluding depreciation & amortization) declined to around 34% for the first half of 2011 compared to around 51% for the same period last year.

This clearly suggests that AOL's acquisition spree is coming at a price as the company incurred higher personnel costs due to additional investments in


and other acquisitions made in in the first quarter of 2011. The outlook is murky, because increasing competition in the display ad market can drive traffic acquisition costs (TAC) higher.


our complete analysis for AOL's stock here


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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.