The Search Ends Here

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

I have never used the Yahoo! (NASDAQ: YHOO) search engine as I always preferred the uncluttered Google (NASDAQ: GOOG). That doesn’t mean I don’t like the stock though. Yahoo! has been doing well for the past few months and suddenly has started to look good.

The Reasons

Yahoo! said it will be using Google’s AdSense and AdMob services to augment revenue from the content on its pages. “By adding Google to our list of world-class contextual ads partner, we’ll be able to expand our network, which means we can serve users with ads that are even more meaningful,” Yahoo! said in a blog. This partnership could help Yahoo! boost revenue from its pages.

In another move, Yahoo! has announced its alliance with NBC Sports Group to share content among them as well as promote each other on television and the internet. The collaboration will help Yahoo! to access NBC’s video content and live sports coverage. This would help Yahoo! improve its audience size and increase traffic.

The company’s balance sheet also looks good. It has $8.41 billion in cash and a very low debt load of $126 million. With that amount of extra cash, Yahoo! could repurchase shares or invest in services that will help the company perform better like developing mobile apps to increase traffic.

The numbers for the fourth quarter were better than expectations. For the first time in 4 years, Yahoo! has reported increases in revenue. Revenue for Q4 was $1.35 billion, up 2% YoY. Earnings were $0.32 per share, 28% higher than previous year’s quarter of $0.24.

The company has no exposure in the growing mobile space. No operating system, or hardware, or apps for that matter. The company has very good viewership on its sports and finance portals. I believe it’s still not too late for Yahoo! to create and come out with a mobile application to meet the needs of relevant users. This could benefit the company immensely.

Another Search

2012 has been pretty good for Google. One of the major sources of income for Google is through online advertisements. For the year ended 2012, the company managed to make around $13 billion from online advertisements which are roughly 41% of the total ad revenues while Yahoo! and Facebook (NASDAQ: FB) managed to make 8.4% and 5.8% respectively. Google is trying to push up its revenue from mobile advertising as people are becoming more reliant on their smartphones and tablets for their communication needs.

Google’s Android operating system for mobiles and tablets controls about 70% of the mobile market. Most people using a search engine on a phone use Google as a default search engine, and with the growth of smartphone market Google can dominate this space for a long time.

The company has not been able to make anything good out of the Motorola acquisition, yet but its plans to introduce its own phone in the market may make the acquisition fruitful. Moreover, the Nexus has the potential to be a winner in the tablet space and with the introduction of Google phones in the market would provide a better integration among the devices.

The Cash/Debt position of the company is more than 6 times. Even though the stocks seems expensive at a P/E of 24, there is no denying that the company has the potential to generate cash and grow further from here on. This stock is more of a growth stock than a value stock.

 In the face of competition

Since Facebook’s disappointing IPO, nobody really looks forward at this stock to outperform. But Facebook’s advertising revenue is consistently on the up and is expected to get better from here. Facebook has also introduced a new technology called the conversion tracking which allows advertisers to track the point of sale.  This could help advertisers to develop ads more specific to user requirements. Given the huge database that Facebook has this new technology can really click with the advertisers and investors can see some increase in the company’s advertisement revenue. 

niteshsanthalia has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. 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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