• by Gavin O'Malley  @mp_gavin, September 30, 2009

An independent AOL will be worth just $4.2 billion, according to respected JP Morgan analyst Imran Khan. "Post-spin, we expect AOL to continue addressing its main challenges, in particular declining search revenue and eroding display pricing," Khan said in a research note issued Wednesday. Worse still, Pali Research analyst Rich Greenfield just valued AOL at a mere $4 billion -- just four times a recent valuation of upstart micro-blogging service Twitter.

In stark contrast, the Time Warner/AOL merger was worth $165 billion in 2000, while in 2005, Google valued AOL at $20 billion when it paid $1 billion for a 5% stake in the company. As recently as January, Google pegged AOL at $5.5 billion when it wrote down its 5% stake.

In late May, Time Warner's board of directors authorized plans to spin off AOL as an independent, publicly traded company by the end of the year.

More optimistic about AOL's future, Pali's Greenfield wrote in a research note: "To the extent that AOL's new management can paint a 2010 story that AOL EBITDA can do better than a 20% decline, we believe there could be meaningful valuation upside -- not to mention, the upside if M&A speculation surfaces (given the significant traffic AOL's sites continue to command)."

Likewise, JP Morgan's Khan alluded to a "rebound" for AOL next year, "as RPM pricing improves and the company implements cost cuts." Without explanation, Khan also predicts declines to resume at AOL in 2011.

Under the direction of new CEO Tim Armstrong, AOL recently outlined a new five-point strategy for the future of the company, including the continued expansion of vertical content, local and online mapping services, its third-party ad network, communication tools, and early-stage investment through a newly formed AOL Ventures arm.

The new AOL is expected to exist less as a Web portal and more as a fragmented network of niche content sites. This MediaGlow network, so-called, presently encompasses over 70 niche content sites -- with many more on the way, according to Jeff Levick, who was recently appointed president of AOL Advertising.

In the second quarter, ad sales at AOL fell 21%. Albeit in a dour ad climate, the unit's total revenue fell 24% to $804 million in the quarter -- actually showing an accelerated decline from the first quarter, when ad sales dropped 20% to $109 million.

Time Warner's latest quarterly filing with regulators showed that AOL brought in $1.67 billion in revenue in the first six months of this year, and reported $315 million in operating income.