AOL Inc CEO Tim Armstrong wants to remake the 25-year-old company into an online media juggernaut by focusing on content creation and advertising revenue, shedding non-core assets.

The company, spun out from Time Warner Inc last December, recently sold its Bebo social network [ID:nN17214689] and online sampling and research arm DMS Insights, and is overhauling its sales force and ad platform.

As a result, Armstrong has warned that advertising sales would remain under pressure through the rest of the year and AOL's stock has shed about a quarter of its value since hitting a high in April.

But as the advertising climate improves with the economy, could it be time for investors to take a second look at AOL?

BUY

Analysts who recommend that investors buy or hold AOL say ex-Google executive Armstrong is rightly focusing on content, given AOL is now too dependent on income from its legacy dial-up service, a lucrative but declining source of profit.

In the first quarter, subscription revenue fell 28 percent to $282.7 million on a 26 percent drop in subscribers to about 5 million.

Clearly the subscription-based access business is in rapid decline, said Benchmark Co analyst Clay Moran, who has a buy rating on AOL. Their best bet is to try and build content and monetize it via advertising. Generally AOL is taking the right steps divesting non-core unprofitable businesses and focusing on the U.S. market where they are strongest.

Moran, who noted there was little point in AOL trying to compete with Google Inc in Web search, has confidence in Armstrong.

We believe that, if anybody can turn this around, he is the right guy, he said.

David Joyce, an analyst with Miller Tabak & Co, likes that AOL management is unifying its content and advertising platform, something it did not do in the past.

AOL has been focusing on the U.S. market and content creation that should drive more interest from consumers and viewers and therefore create better metrics that advertisers can pay for. They can't just be a portal, said Joyce, who has a neutral rating on AOL.

SELL

Analysts who are more critical of AOL point to scores of competition in online content, such as newspapers, user-generated sites such as Demand Media and other big Internet names such as Yahoo Inc, which are all wooing the same advertisers.

Credit Suisse analyst John Blackledge stamped AOL as a sell since the spin-off, a position he still holds.

They are betting on content and display and the reality is it's very competitive to grow eyeballs, he said. I just don't think they are going to grow display advertising.

Gartner Inc analyst Ray Valdes, who does not cover the stock, said AOL does not have a clear strategy.

We know they are getting rid of distractions such as a Bebo and once they clear those decks, the question is what will remain? he said.

Going around trying to be a content play in my own thinking is expensive. It's a been-there-done-that kind of play. As we all know, that hasn't played out well for Yahoo and it hasn't played out well for AOL and it hasn't played out well for traditional media.

Citi analyst Mark Mahaney has a hold rating on AOL and says the stock is cheap, but for good reason. He has a price target of $29, assuming four times cash flow estimates this year. AOL shares were trading at just under $22 on Friday.

AOL faces very significant competitive risk from Yahoo, Google, Facebook and a slew of social media companies. The strategy is the correct one, I just think probably the best strategy you can come up with doesn't mean it will work. One should be skeptical that there is a long term win for AOL, he said.

It is a cheap stock -- it's cheap for a reason. I don't think there is an obvious acquirer of AOL. I'm firmly neutral on it.

(Reporting by Jennifer Saba; editing by Andre Grenon)

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