Higher Quality Content Could Give Yahoo’s Stock an Upside

Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since 2012, Yahoo’s (NASDAQ: YHOO) share price has appreciated approximately 40%, primarily due to the appointment of new CEO "Marissa Mayer". The new user centric approach used by the CEO is about developing customised products and services for its users. During the last few years, Yahoo has consistently lost market share to competitors such as Google (NASDAQ: GOOG) and AOL (NYSE: AOL) in several segments.

Going forward, it is essential for Yahoo to impede the decline in ad revenues and offer better quality content on its websites to generate higher traffic.

With growing popularity of smart phones and tablets, mobile platform has become a key revenue driver for internet companies. Higher quality content carried across various internet enabled devices can help Yahoo reclaim some of its lost market share and report consistent growth once again.

Importance of Quality Content

Yahoo generates the highest percentage of its revenues through display ads with a contribution of around 42.5% to the overall revenues. This is followed by search advertising at 34% and subscription business at 15%.

Quality of content underpins the volume of revenue generated through display ads. Better quality content will lead to higher user engagement, resulting in higher traffic directed to Yahoo’s website. To initiate more user engagement, Yahoo now offers customized content to users, based on their online footprints and sharing trends on social networking sites.

Such efforts have led Yahoo into reporting robust growth in its monthly unique visitors. Monthly unique visitors for Yahoo grew from 154 million during June 2012 to 167 million in January 2013. This is crucial for Yahoo’s display ad revenues, as a higher number of unique visitors will lead to more page views.

A larger user engagement through better content will increase the average time spent on each page. This can enable Yahoo in charging a higher price for display advertising. At present, Yahoo is ranked third in terms of monthly unique visitors; however, with regards to average time spent on its website, Yahoo moves to the second spot.

It must be noted, if the revenue per page view for Yahoo increases by providing better content, then there may be a huge upside to its current share price in the long run.

Key Competition

Yahoo primarily competes with Google and AOL in display advertising. Google generates highest percentage of its revenues though PC Search Ads with contribution of around 61% to the overall revenues. This is followed by Mobile Search Ads at around 13% and You Tube at 5%. Google is a global leader in the PC Search market with a commanding market share of 67% reported during 2012.

Within the mobile search market, Google is even more dominating with approximately 97% market share. Google operates its PC Search Ads division on an EBITDA margin at around 52%; in contrast, the overall EBITDA margin stands at 45%. The primary expense associated with PC Search business, is the traffic acquisition cost.

Going forward, Google must keep a cap on its TAC, and make sure any increase in cost stays in proportion with revenues. 

AOL generates its maximum revenues through Dial-up Internet Subscriptions with a contribution of around 32.2% to the overall revenues, followed by Display Ads on AOL sites at 26% and Display Ads on third party websites at around 22%.

The monthly unique visitors for AOL sites have reduced during the past four years to 113 million from 123 million. This is predominantly due to dropping of operations in several European countries and sale of few business units.

To counter the decline in the user base, it made several acquisitions during 2010. It acquired TechCrunch, Thing Labs, Huffington Post and StudioNow. AOL’s market share in internet search has been on a consistent decline over the past five years.

Presently, AOL's market share in internet search is below 1%, and therefore, it has recently signed a revenue sharing deal with Google to bolster its presence in the internet search market.

Initiatives to bolster the Mobile Platform

Yahoo has strategically discontinued several mobile apps in an attempt to offer only user centric products. At present, it offers approximately seventy five apps; however, it intends to cut it down to a more controllable size of fifteen.

Recently, Yahoo reported that during the last quarter its mobile users exceeded the 200 million mark for the very first time. This underpins the importance to providing customized content by consolidating the mobile platform to a more controllable size and offering only user centric products.

The unique users for Yahoo are estimated to grow with increasing internet penetration in the emerging markets. It has existing partnerships with leading smart phone makers that amalgamate its content on mobile devices. Furthermore, it is also developing apps for the Android cluster in order to develop new partnerships.

The internet users for Yahoo grew from 550 million during 2008 to 670 million in 2011. Going forward, if Yahoo incrementally develops on the current initiatives taken for smart phones and tablets coupled with more user centric products, then it should consistently report growth in earnings and provide investors with higher pay-outs.

Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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