Yahoo Earnings Preview: How Will Number Three Return to Glory?

Matthew 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) is one of the most popular destinations on the Internet; however its shareholders have not exactly been handsomely rewarded over the past few years.  In fact, other than a very recent rally, Yahoo’s stock price has been stuck right around the $15 level since 2009. With the company set to report earnings next Monday, investors will be looking for a few things.  Number one, is the recent rally justified?  Also, what steps is the company taking to turn Yahoo around and create shareholder value?

<img src="/media/images/user_14267/yhoo-5-year_large.png" />

Yahoo has a range of Internet offerings including email, search, Yahoo Shopping, Yahoo Travel, Yahoo Real Estate, Yahoo Autos, and others, not to mention their distinctive Yahoo homepage.  Monthly users of Yahoo’s various websites number in the hundreds of millions.  In addition, Yahoo has a 35% stake in Yahoo Japan as well as a 24% stake in Chinese Internet Conglomerate Alibaba Group.  The company was a 42% stakeholder in Alibaba and recently sold about half of its ownership for $7.6 billion, and the company has pledged to use $3 billion of this towards stock repurchases and/or dividends.  This is the catalyst that caused the recent rally which can be seen on the above chart beginning in September 2012.

In terms of corporate leadership, Yahoo has had a revolving door in terms of its CEO.  Since 2007, there have been seven CEOs, with former Google (NASDAQ: GOOG) executive Marissa Mayer the most recent to take the helm.  Speaking of Google, one of Yahoo’s biggest challenges in reinventing itself as a company, and one that it hasn’t been able to come up with a solution to yet, is how to recapture some of the market share that Google continues to steal away.  According to ComScore, Google took a record 67% of all online search traffic as of November and has its sights set on attaining a 70% market share in the near future.  Yahoo is currently in third place with only 12.1% of all search traffic (down from 27% as recently as 2007), following Microsoft’s (NASDAQ: MSFT) Bing search engine with 16.2% of traffic. 

Although Yahoo has a search/advertising partnership with Microsoft, it has not provided the tag-team effect on Google that the two companies have hoped for.  Under the arrangement, the companies will retain their own branding, and Yahoo’s search results will say “powered by Bing.”  In exchange for this, Microsoft pays Yahoo 88% of the revenue it generates as a result of Yahoo searches.  I’m not sure how beneficial Microsoft considers this deal.  Since the deal was announced in 2009, Bing’s market share has doubled from 8% to its current level, while Yahoo’s has sunk from 20% to 12%.  Anyways, one of the major concerns I have going forward is that Google still is growing its market share after all this time, and Microsoft is growing theirs as well.  Before I become bullish on Yahoo, I need something new from Ms. Mayer that indicates a new strategy to recapture market share. 

Until that happens, I simply don’t believe the company warrants the valuation it currently has.  When earnings are announced Monday, the company is expected to report $1.13 per share for 2012, which are expected to grow modestly to $1.15 and $1.29 in 2013 and 2014, respectively.  So, Yahoo trades at 17.7 times earnings, with a 7% forward earnings growth rate and a heck of a lot of uncertainty.  While it is true that Yahoo has about $7 per share in cash and various investments, I would need to see a concrete future growth plan (and maybe a little CEO stability) before even considering an investment in Yahoo.

KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of 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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