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Resuscitating Yahoo! Inc. Won’t Be Easy, But Is Possible

Published 09/03/2015, 02:05 AM
Updated 05/14/2017, 06:45 AM

Yahoo! Inc. (NASDAQ:YHOO) certainly has some advantages in it. The CEO, Marissa Mayer, has over the past three years sought to acquire several properties that she deems useful for the company’s turnaround. However, the long-term durability of Yahoo’s advantages, real or perceived, is questionable at best.

As Yahoo continues to lag behind in hot trends like mobile, the company is not only leaving money on the table currently but also eroding its existing advantages. That can be seen in the way some of Yahoo’s popular Web properties are continuously fading in popularity and usage.

Inability to implement mobile experience costing Yahoo

Yahoo may have itself to blame for most of the troubles it is facing. The company has been witnessing the rise of mobile, with itself being active in mobile analytics through Flurry. However, you can see that Yahoo has done very little, if anything, to bring mobile experience to its traditional Web properties.

The failure by Yahoo to connect its Web services to mobile applications has led its once popular services to become less relevant. Web experiences like Yahoo Mail, Yahoo Finance and Yahoo Sports have these days become only a pale shadow of their former selves.

Under Mayer, Yahoo has been able to acquire a number of mobile assets, but the world is still waiting to see the impact of these acquisitions on Yahoo’s financial results.

Digital advertising dollar escaping Yahoo

Marketers once flocked to Yahoo! Inc. (NASDAQ:YHOO) to get the attention of Web users. But Yahoo has continued to lose its share of the digital advertising market. Both Yahoo’s Display and Search ad businesses are not doing as well as one would expect. The likes of Facebook Inc (NASDAQ:NASDAQ:FB) and Twitter Inc (NYSE:NYSE:TWTR) are actively eating up Yahoo’s slice of the pie in the online advertising space.

There are several reasons Yahoo is losing out in the digital ad market. Part of the reason is that the company has not been able to innovate as fast as its competitors. Social networking companies like Facebook have been able to harness rich data on their platform to present advertisers with better advertising solutions, which Yahoo cannot match.

For example, the rich user data from social networks enables marketers to properly target their digital campaigns. Therefore, as long as marketers are able to see better ROIC on platforms like Facebook, they will continue to flock there as they abandon Yahoo and other aging advertising services.

Yahoo Search waning

Usage of Yahoo’s Internet Search service has also continued to plummet. Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:NASDAQ:MSFT) are doing well in the Internet Search space because they are more innovative than Yahoo.

The sad commentary is that Yahoo has badly fallen behind its Internet search rivals and it may never catch up, but will continue to lose money.

Internet Search alone accounts for about one-third of Yahoo’s net revenue, which means that waning fortunes in Search market will continue to hit the company where it hurts most.

Risk of low-return projects

It has already been pointed out that Yahoo! Inc. (NASDAQ:YHOO) is lagging rivals in key areas, especially mobile and digital advertising markets. At this point, if the company decides to hurry up its mobile projects, for instance, it may end up putting money in expensive undertakings that give inferior results, further deepening its woes.

Given that Yahoo let opportunities slip from its hands, the company is hard-pressed from all sides and needs a balanced approached to its revival. Any missteps at this juncture can be too costly for the company to bear or overcome.

The silver lining on Yahoo’s dark cloud

Huge user base:

If Yahoo! Inc. (NASDAQ:YHOO) could only move fast to do the right things, there is no reason the company cannot achieve a strong turnaround. The company has a huge subscriber base that it can leverage for accelerated growth in various aspects of its business. Yahoo boasts over 800 million subscribers, which is a critical mass of audience that it can harness to its advantage. The company needs to come up with captivating new products and features and also deepen mobile implementation, because these efforts will get things back on the right path.

Cost curtailment:

Yahoo has been trying to cut costs, including through headcount reduction, and the strategy is commendable. Continued cost control should help uplift operating margins, strengthening the bottom line. However, the company needs to find more creative ways to lower expenses in more meaningful ways than what it may already be practicing.

There should also be proper plans to channel the saved funds to the right courses for better results. But you can expect CEO Mayer to do that well.

Brand advertising:

There is one area that Yahoo clearly excels – brand advertising. The company can leverage on this advantage to try and grab back the share it has lost in areas like digital advertising spend and Internet Search.

Revenue By Segments

Yahoo’s financial health:

Yahoo has a strong balance sheet. The company had more than $5.8 billion in cash and marketable securities at the end of the most recent quarter. As such, Yahoo has sufficient cash to channel to small acquisitions, development of new products, operations and shareholder returns.

Capable management:

It is true that Mayer has been at the helm at Yahoo! Inc. (NASDAQ:YHOO) since 2012 but challenges in the company have only persisted. Of course, Yahoo is still dealing with many legacy issues, but it also appears unfair to say that Mayer has failed. She has been able to reorganize Yahoo in various ways to show that she is a capable manager and an exciting executive at that.

You can expect Mayer to put managers of her type in every key division inside Yahoo to build an organization like Alphabet (Google), where innovators are allowed to lead and inspire.

Conclusion

Yahoo! Inc. (NASDAQ:YHOO)’s stake in Alibaba (NYSE:BABA) Group Holding Ltd (NYSE:BABA) has turned out to be a source of both hope and worry. The company is trying to spin off its stake in Alibaba in a tax-free fashion to maximize value for the shareholders. The spinoff is expected in the fourth quarter 2015. If the deal succeeds, it would be a huge benefit for Yahoo and its shareholder community. However, it could also fail if the IRS decides unfavorably about it. As such, Yahoo’s exposure to Alibaba is currently a cause for volatility in the stock.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

by Neha Gupta

Original Post

Latest comments

I'm not so sure about Google and Microsoft being more innovative in internet search. As a search engine, there are only so many features you can offer outside of an advanced search. What exactly are you are referring to when you mention Google and Microsoft being more 'innovative' in this area? You did hit the nail on the head in regards to mobile though. It is not only disappointing but also surprising that Yahoo was unable to implement a mobile experience thus far. Yahoo is an internet juggernaut and should be able to implement this.
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