This Stock Will Weather the Storm

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

Turbulent waves call for skilled, resilient captains.  Marissa Mayer is one such captain.

Since taking the top spot at Yahoo (NASDAQ: YHOO) in July, Mayer has implemented a number of structural changes to Yahoo’s business models and culture. Here are a number of the positives.

Mayer Makes Ground

  • Mayer pulled a page out of Google’s (NASDAQ: GOOG) playbook and increased employee perks to foster a better environment.  (Think free cafeteria food.)
  • Since taking office, Yahoo has improved its content properties like Yahoo Mail and Flickr.
  • Yahoo “acqui-hires,” meaning the company bought smaller companies for their developer talent, as well as for their products.
  • Yahoo’s search revenue, powered by Microsoft’s Bing search engine, increased 14% year-over-year, excluding commission payouts.
  • Revenue for the most recent quarter increased 2% year-over-year.

There’s More in the Hopper

And a lot more changes are one the way.  For example, Mayer is positioning Yahoo to take on more business from mobile traffic.  In aggregate, Yahoo content sites currently get above 200 million unique mobile visitors per month.  Mayer agrees that mobile is a “nascent source of revenue,” but she is prepping the company to develop new tools to improve its monetization of mobile traffic.  I believe that in the future, this will prove to have been a wise investment.

Moreover, Mayer plans to continually customize its content for people, based on where they live, what they like, and their background.  Think customized Google search and highly-relevant advertisement and product recommendations.  Also, I believe that Yahoo will get better at customizing for user preferences if it is able to grow users of its e-mail service, and especially if it launches a browser that can gain considerable traction.

Finally, Mayer plans to continually launch “smart partnerships.”  For example, Yahoo provides certain data for Apple’s Siri service on iPhone.  I think that smart affiliations like the Apple partnership will go a long way toward increasing Yahoo’s distribution.  Now that we know the good, here’s the bad.

Continual Erosion

Despite the gains, Yahoo still faces a host of obstacles.  For example, Yahoo’s display ad revenue – its core business – dropped 5% year-over-year.  This includes sales from video, interactive, and graphical ads. 

Also, I believe that people are “trained” to use Google’s search algorithm.  Venture capitalist Bill Gurley wrote an interesting post on this topic, where he only used Microsoft’s Bing search engine for an entire two months.  I recommend taking a look at his short post, called “My Life with Bing.”  His experience is insightful and explains Google’s embedded competitive advantage in search.  However, at the end of the day, many argue that Yahoo's and Bing's search is just as good (if not better) than Google's - but it all comes down to what people are used to using.

Another issue is that advertising agency executives are honing in on Google’s and Facebook’s (NASDAQ: FB) ad platforms.  Google’s traffic is clearly tops.  But executives are also taking a compelling interest in Facebook.  The reason is because Facebook allows advertisers to run ads for Facebook pages that show a person’s “friends” who also ‘like’ the page.  The new friend-to-friend recommendation of products and services is a compelling proposition.

Moreover, Facebook is increasingly blurring the lines between itself and the other search giants.  Facebook now allows users to search for information on timelines, meaning that it can now compete directly with Yahoo, Microsoft, and Google.  Click here to see for yourself – simply click “Timeline.”

Finally, notice the right side of this chart.  Yahoo’s market share is falling. 

<img src="/media/images/user_13210/2-7_large.jpg" />

On one side, the drop looks terrible.  But on the other, Facebook is now in the search mix, stealing traffic away - which makes things look less bad for Yahoo.

The Bottom Line

Yahoo’s CEO Marissa Mayer is doing a fine job of repositioning Yahoo to provide more useful, customized products for its customers and content consumers.  I don’t doubt her ability one bit.

The problem is that Yahoo is in an incredibly competitive business, and it is hard for any company to gain a long-lasting competitive advantage.  Any shortcomings aren’t necessarily a product of Mayer, but rather of the increasingly competitive market of search.  Thus even while Mayer “Steadies the Ship” and steers Yahoo toward a more prosperous future, Yahoo’s core businesses continue to slip.  This doesn't make Yahoo a terrible company - it just means that Mayer needs more time to "weather the storm."


ChrisMarasco has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook, Google, and Microsoft. 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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