Yahoo!’s Potential

By Alvin Gonzales - July 31, 2012 | Tickers: AAPL, BIDU, BRK-B, GOOG, YHOO | 0 Comments

• Email
• Print

Is Yahoo! (NASDAQ: YHOO) worth buying? It is a question investors have probably been pondering since Yahoo appointed former Google (NASDAQ: GOOG) executive Marissa Mayer as CEO. It is a tough question. After all, history is littered with companies that changed CEO, but failed to change direction.

Warren Buffett, legendary investor and CEO of Berkshire Hathaway (NYSE: BRK-B), has firsthand experience in this matter with Berkshire’s textile business. After trying for years to improve its textile business through managers Ken Chace and Garry Morrison, whom Buffett considered “excellent managers,” Berkshire finally gave up and closed its textile business in 1985. In his 1985 letter to shareholders, Warren Buffett states,

“My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad).  Some years ago I wrote: ‘When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.’ Nothing has since changed my point of view on that matter.  Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

This is sound advice. However, it is important to understand the context of Buffett’s message. Buffett was referring to businesses that fundamentally have terrible economics. Businesses that even when run by excellent people still do not succeed. In the case of Yahoo, the industry of providing online services and online marketing services is fundamentally good. The cost of capital is low and websites have a global reach.

This is proven by the huge success of companies like Google and Baidu (NASDAQ: BIDU). Baidu is a Chinese company that provides search services in China and Japan that are similar to Google. The following table compares Yahoo to the two companies.

Yahoo lags the two in performance. Yahoo’s revenues have been declining, while Baidu’s and Google’s have been growing. However, Yahoo does have good assets. Google recently ranked the top 1,000 most visited websites in the world and Yahoo is near the top (Google excluded itself from the list).

In terms of unique visitors per month, Yahoo is number three on the list, beating out Wikipedia, Twitter, and Baidu. Yahoo Japan is number 28 on the list. Furthermore, Yahoo is available in 60 countries and regions and in more than 45 languages. In addition to its homepage, it controls Yahoo News, Yahoo Finance, and Yahoo Sports. So what is wrong with Yahoo?

The problem with Yahoo is that it is not translating its large number of users into ad revenue. Basically, Yahoo is not engaging its users enough. Yahoo.com has almost double the number of unique visitors of Baidu each month. However, Baidu has 33 billion more page views. Yes, Baidu is a search provider, but so is Yahoo.

This is where Marissa Mayer comes in. She is experienced at developing products that engage users. While much of her success is attributable to working for Google (remember Buffett’s advice), she did join Google at an early stage and helped develop many products (e.g. Gmail, Book Search, and Google Search) that contributed to Google’s success. Throughout her 13 years with Google, she launched more than 100 features and products. Before she left, she was in charge of Local, Maps, and Location Services.

However, first, Mayer needs to revitalize and refocus a Yahoo that appears to have overextended itself. It is in way too many areas and should consolidate its forces. Yahoo should follow the advice of Steve Jobs, the legendary former CEO of Apple (NASDAQ: AAPL). Steve Jobs once advised Google CEO Larry Page, “What are the five products you want to focus on? Get rid of the rest, because they're dragging you down.”

When Steve Jobs returned to Apple, he cut down products and refocused the company. As a result, he was able to maneuver Apple from the brink of bankruptcy to the dominant company it is today. Mayer needs to do the same. She needs to cut down the number of services and focus on engaging Yahoo’s users.

Returning to the opening question, Yahoo should go on the watch list for now. In terms of book value, the company is not a huge steal. Furthermore, Mayer has not announced any plans yet, and this is her first job as CEO. However, the company does have strong assets and a lot of potential under Mayer. If Mayer consolidates the company and starts producing engaging products, the company will turn into a beast. Do not ignore Yahoo.

• Email
• Print
• Feedback