The Search Engine Games Continue

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The battle among search engines seems to have ended a long time ago with Google (NASDAQ: GOOG) on top. The collaborations between Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) with their respective search engines and ad network doesn't seem to help them regain their former market share in the search engine arena. So doesn't this mean it's all over for Yahoo and Microsoft? Is Google's dominance permanent?

Despite the little growth in Yahoo's revenue during 2012, the company's stock rallied during last year by nearly 23%. In comparison, Google's stock rose by only 9.5% and Microsoft remained nearly unchanged with a 2.9% bump. This might indicate that Yahoo has regained some of its investors's confidence back. Yahoo's management is trying to lead the company into a new direction.

In 2012, Yahoo sold a large portion of its stake in Chinese e-commerce Alibaba Group for $7.1 billion. This decision has lead to a sharp rise in the company's cash flow. According to the company's cash flow report, the net gain from this sale was $6.2 billion. These funds open up new frontiers for Yahoo. The company has already used some of these funds to augment its repurchase program of its stock to nearly $2.2 billion in 2012. The rise in cash might lead to a higher repurchase program or dividend payment and will keep the company's stock from falling. This could also lead Yahoo to raise its R&D expenses. 

R&D is a key factor that could imply the potential future growth of a company. During last year, Google's R&D provision rose by 32% while Yahoo's R&D expense fell by 4%. Nonetheless, in terms of R&D out total revenues, Yahoo's ratio reached 18% while Google's ratio was only 13.5%. In other words, a larger portion of Yahoo's revenue goes to R&D compared to Google. The recent added funds along with company's new management might also lead to a rise in R&D or at least bring some new opportunities that will regenerate Yahoo. 

Everyone is going mobile

For Microsoft, the recent release of Windows 8 might lead to growth in Bing's revenues; this new OS might result in a rise in Microsoft's platform in smart-phones and tablets. The sharp rise in Nokia's sales of its Lumina Smart-phone indicates potential growth in Microsoft's revenue not only from its OS, but also from using its platform and search engine. Yahoo is also trying to expand its mobile capabilities; e.g. the company has recently acquired a Video Chat Startup.

The drive towards mobile is self explanatory: it's a growing market. But the profit margins and CTR (click through ratio) are the key parameters for higher revenue, and it's still unclear if Mobile is capable to beat the CTR and a higher effective CPM (cost per mille) of desktops. If these companies will be able to take from Google's market share in mobile, this could augment their profit margins.

For Microsoft, unlike Yahoo and Google, its search engine operation isn't its main source of revenue: the company's on-line division that includes Bing and Adcenter account for nearly 4% of Microsoft's total revenues; this division continues to lose money for the company.

Unlike Microsoft, Yahoo and Google still present an operating profit: during 2012 Yahoo's operating profitability was 11.4%; Google's operating profitability reached 25.4%. Google's higher profitability isn't the only thing it has up on Yahoo. Google's revenues grew by nearly 32% during the year while Yahoo's revenues remained virtually unchanged.

Despite all that I have stated above, Yahoo's current outlook is that its revenues in 2013 will remain nearly unchanged compared to 2012. This outlook might come true or is just another tactic of setting the bar low.

I think 2013 might bring some surprises from both Yahoo and Microsoft that could not only impede the sharp growth in revenues of Google but also revive the search engine market. 

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liorc 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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