This Search Engine Shines Amidst Tech Sector Weakness
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Earnings reports for 2012 Q3 have been a battleground all over the tech sector, as even the giants stumble on weak sales and revenues. Only a few companies have surprised to the upside of analyst expectations, which were low to begin with. Yahoo! (NASDAQ: YHOO) is one of these companies. This search engine provider has been punished by the market in the last few years, but with a new CEO, and a renewed commitment to mobile technologies, it appears as if the company is starting to turn around, as evidenced by its latest earnings report.
Yahoo reported Q3 EPS of $0.35, which beat the $0.25 analyst consensus by a massive 37.8%. Net revenue for the quarter came in at $1.09 billion, which topped the Street's expectations by about $10 million. The news powered shares up by 3.7% before the bell on Tuesday, as investors cheered these better-than-expected results. Moreover, these results exclude a $2.8 billion gain resulting from the sale of Alibaba shares, in which Yahoo! owned a significant stake. The report is without a doubt a good tiding for the struggling search engine provider, which has been suffering from management issues in recent years.
The Street was looking for additional color on future plans from new CEO Marissa Mayer's first earnings release. Mayer, a former Google executive, has a number of plans to revamp the search giant that gets over 700 million monthly visitors. So far, the company has been unable to redirect its focus towards new mobile technologies, relying instead on its traditional media-centric approach. In the report, Mayer stated that Yahoo!'s top priority was now creating a “focused, coherent, mobile strategy” in which she sees clear upside potential. This shift towards mobile technology is of paramount importance for Yahoo!, as it is for most tech companies these days. After all, companies that fail to keep up with changing technological standards are likely to be left in the dust.
Taking this point into account, it remains to be seen whether this turnaround can be achieved, especially considering the success of chief competitor Google (NASDAQ: GOOG), which still holds a greater market share than Yahoo!. Additionally, earnings growth at Google has been outpacing Yahoo!, despite the former missing big-time in Q3 this year. Another point of concern is Yahoo!'s partnership deal with Microsoft (NASDAQ: MSFT), as advertising rates continue to fall below expectations. Mayer spoke of the commitment towards strengthening the cooperation with this software provider and search engine partner. Microsoft's own search engine division is still losing a considerable amount of money, and has not been able to gain market share of any importance.
Valuation and Metrics
Yahoo!'s valuation looks quite attractive at the moment. The stock has a P/E ratio of 17.8x, well below the 34x industry average, and trades at only 1.45 to book. Yahoo!'s main competitor Google trades at 21.3x earnings and 3.36 to book. Yahoo! has a decent operating margin of 16.5% and a less than stellar return on equity of 8.15. Still, the company has an impressive balance sheet and virtually no debt, with a microscopic LT debt to equity ratio of only 0.26. The stock isn't available at bargain prices right now, but it looks fairly valued compared to the industry.
All in all, I'm impressed by Yahoo!'s most recent earnings report, which aside from displaying encouraging results also affirmed Yahoo! CEO Mayer's commitment towards new mobile technologies, a move which strikes me as coming better late than never. Despite these results, Yahoo! is still being outpaced by Google in most areas and it will remain to be seen how the company deals with the switch to an altered business model. The battle thus continues for this struggling search giant, although some rays of hope are beginning to peek through the cloud cover.
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DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google, Microsoft, and Yahoo!. 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.If you have questions about this post or the Fool’s blog network, click here for information.