AOL Shares off 15%. Buy on Weakness.

While Google is having a rough year, AOL had a rough day after reporting 1Q10 earnings that missed consensus expectations. The shares declined 15% on the day of the report.

Display down 13% y/y vs. the 20% y/y growth at Yahoo, blamed on a salesforece reorganization disruption and a reduction of ads on the web pages to improve the user experience.

Domestic display down 10% y/y.

International display down 29% y/y - weakness at social networking site Bebo, which they intend to sell or shut down, and winding down of operations in France and Germany were to blame. Said can start to see growth in display in 1Q 2011.

Search down 27% - blamed it on a 26% decline in AOL paid subsribers, which tend to search more than non-paying visitors. Says search and contextual advertising revenue declines through rest of year will be higher than in Q1. Said working with others, I think Microsoft Bing, on a new search deal. Current deal with Google expires end of year. Should know by end of summer.

Like Google, I would buy on the weakness there. AOL has great asset value and I believe that Tim Armstrong can successfully turn this business around.

Citigroup Internet analyst Mark Mahaney is less enthused and maintains his hold rating and $29 price target but list several positives to the AOL story:

1) AOL still remains a top 5 U.S. Internet property; 2) Solid balance sheet with $262MM in cash, approx. $100MM in FCF per qtr, and asset sales on the horizon (ICQ being sold for $188MM); & 3) At 3X ’10 EV/EBITDA, valuation is the lowest of any ‘Net Stock.

His negatives, while partially legitimate near-term, overlooks the longer-term asset value enhancement:

1) Clearly deteriorating fundamentals; 2) Broad and significant market share losses – basic Internet usage, Display Advertising revenue & Search queries; 3) A significant profit hole from the structural decline of its Subs biz; 4) Substantial competitive risk; and 5) An unproven (@ AOL) management team.