Can Mayer Clean up Yahoo?
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yahoo! (NASDAQ: YHOO) announced that it has appointed former Google (NASDAQ: GOOG) executive Marissa Mayer as its new Chief Executive Officer (CEO). Prior to joining Yahoo!, Ms. Mayer was responsible for local and geographical products for Google. This includes Google Maps, Google Earth, Street View, Zagat and local search for both mobile and desktop. The announcement came as a surprise, as Mayer’s name was not part of the company’s shortlist of candidates after former CEO Scott Thompson resigned from his post. Recall that Mr. Thompson resigned due to his inflated resume. Many insiders believed that its interim CEO Ross Levinsohn would step up to the permanent post. Mayer will become the fifth chief executive in less than a year as the company struggles to compete with the social media site, Facebook (NASDAQ: FB), and search engine giant, Google.
It is clear that the multiple CEO replacements suggest a lack of direction for Yahoo!. Despite being one of the most recognizable brand names in the technology industry, it has performed quite poorly in past years. The problem with its previous CEOs is that they failed to recognize upcoming trends and consumer behaviors. Thus, its competitors have consistently eaten into the company’s market share.
Mayer’s appointment as head honcho for Yahoo! is a sign that it will focus on technology and products. There were reports that its former interim CEO Levinsohn insisted the company should continue to focus on content and advertising. It is interesting to note that the renewed focus on products and technology is likewise the strategy of another tech giant, Apple (NASDAQ: AAPL). Apple also struggled in the 1990’s. It was able to turn around its operations when it launched several blockbuster products in recent years, the same reason both Google and Facebook experienced tremendous success; both tech giants are constantly improving their products. When you start to focus on products, you will be able to touch base with consumers. This is something that Yahoo! failed to do in previous years.
According to Business Insider, Mayer’s first order of business will be spending top dollar to hire top-notch engineers. Mayer made a quick examination of Yahoo!’s headcount, as well as its organizational chart. She found out that Yahoo! does not have the kind of engineer to total headcount ratio as Google and Facebook. Without these engineers, the plan to refocus on products and technology will definitely fail. More than a thousand of its engineers have moved to different companies as it embarks on a content-driven strategy. The only solution to its problems is to create a culture of innovation. Thus, there is a need to rebuild its army of engineers to execute Mayer’s plan. Moving forward, I expect newer Yahoo! offerings to definitely enhance its profitability.
Vote of Confidence
I have been reading positive reports about the Board’s decision to appoint Mayer. Most analysts praised Yahoo!’s decision to choose Mayer over other candidates. An analyst from Evercore said that Mayer’s deep knowledge of consumer behavior and trends will definitely boost the company’s plan to develop products. The analyst further added that she has extensive experience managing several products at once. On the contrary, other analysts are concerned that Yahoo! may be pursuing an aggressive strategy that will have an impact on its cash flow and profitability. There are also concerns that a product-driven strategy will neglect the content side of the business. Its content business has been a consistent cash flow generator for the company.
Valuations
The stock is trading at 13 times earnings. Adjusting for net cash, the stock trades at 12 times earnings. This does not look cheap on an absolute basis. However, the stock does look cheap relative to its growth prospects and historical valuations. For the last five years, the stock has traded between 18 and 49 times.
Its listed peers are valued higher. For instance, Google trades at 18 times earnings. Even Microsoft is valued at 15 times earnings. The premium valuations are attributed to their relatively better future prospects. On the average, these companies are forecasted to grow earnings by 13% a year, significantly higher than Yahoo!’s forecast of 9%.
I also believe that the overhang in Yahoo!’s share price is due to persistent changes in top management. Going forward, I expect that there will be no changes in leadership for the coming years. In my view, its board has decided that the right strategy is to focus on innovation and product creation. While it is too early to tell, Marissa Mayer could be the CEO that makes significant strides for Yahoo!’s future.
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