Yahoo's New Bing Collaboration Will Drive the Stock Higher
Helen 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 a kingpin in contemporary email services. All the same, its service package extends beyond email as it currently places profound accents on advertising and marketing. Following immense pressure and competition from rival Google (NASDAQ: GOOG), Yahoo! changed tactics and intensified advertising and marketing. This reaped some reward as the company recorded revenues well over $6 billion in fiscal year 2010 - a huge increment. As an ambitious investor, I have to delve through the financial package that Yahoo! extends to its stock holders. I need to know if the company has a promising future or if there is a looming dead end.
Currently, Yahoo! rests on an $18 billion market cap. This is a mere fraction of Google’s incredible $208 billion capitalization. Google poses a formidable threat to Yahoo!. In reality, it has trampled on Yahoo! in an unprecedented fashion, and it has taken a toll on Yahoo!'s ability to maintain earnings growth. In an effort to manage costs, the company has had to undergo head count reductions. Recent news indicates that Yahoo! is planning to implement a major lay off amid plans to restructure its core initiatives. I believe that this may avail a scenario with two possibilities. First, there may be a possibility of increased earnings per share in the short-run. The current earnings multiple is around 17, but with quarterly revenue growth hovering near zero, investors are not likely to continue rewarding the company with such a high multiple. Any cost savings will flow to earnings per share in the short run, which will increase because of the decrease in expenses. On the flip side, such news may weaken the faith that investors have in Yahoo! and could lead to immediate compression of the earnings multiple. In a creative enterprise like Yahoo!, the company is bound to lose top, creative employees and salespersons, stunting its long term growth possibilities. Competitors like Google and AOL (NYSE: AOL) may use this as a platform to stage counter attacks against Yahoo!. AOL in particular needs such a breakthrough as it is currently leading from behind in comparison to Google and Yahoo! particularly in search market share. AOL's search market share is around 1.6%, while Yahoo! still maintains 13.8% of the U.S. market. At this point, a substantial part of both Yahoo!'s and AOL's earnings come from content rather than search. Thus, Yahoo! faces a two-front war: First, in search with Google, and second, in content with AOL. Other measures to raise cash, like the potential sale of Yahoo! Japan have stalled .
Earlier this year, the stock was hit with news of Yang’s resignation from Yahoo!'s board of directors. This resignation came amid bombardment by investors over management’s failure to increase shareholder value. This resignation of Yang, a co founder, has spelled a dim financial future for Yahoo!. I personally believe that this news has affected competitors like Google in a number of ways. First, Google has seized the opportunity and greatly improved its operational framework. Any internet user can attest to the fact there has been a notable improvement in the service package that Google extends. It is using Yahoo!’s string of mishaps to galvanize its superiority. This is evident in the recent implementation of new algorithms for search engine optimization. Google says that these algorithms will go a long way in improving the ultimate internet experience.
Although the resignation news is a leaden blow, there is still some light at the end of the tunnel. Yahoo!'s intellectual property could be a real money-maker in the courtroom. The recent revelation on Yahoo!’s lawsuit against Facebook has revived a new burst of energy in speculative investors. Yahoo! has sued Facebook for infringing ten of its advertising-related patents. This fresh lawsuit also touches on the methods that Facebook uses to advertise on the internet. Critics argue that Yahoo! purports to suffocate Facebook’s impending entrance into the stock market. In as much as this may bear some shred of logical sense, I believe that it is not true. It simply is not correct for Yahoo! to tolerate any infringement of its IP rights. I have convictions that this lawsuit has a high probability of seeing Yahoo! prevail. If Yahoo! manages to win the lawsuit (or more likely, that Facebook settles and pays royalties so that it can continue using Yahoo!'s IP), I believe that it will greatly improve the faith and confidence of stock holders. In addition to that, it will act like a stepping stone to better achievements.
Currently, Yahoo! has had mediocre revenue growth over the last year, but it remains very profitable. Gross margins run near 70%, and its Yahoo! Finance franchise remains a valuable property for internet traffic. Although the company's prospects remain murky, I am quite impressed by the way Yahoo! is handling itself. Despite all of its challenges, Yahoo! still puts on a brave face and forges ahead. This spirit shows that Yahoo!'s board of directors has a great level of confidence. Its board declined the takeover offer by Microsoft back in 2008. Going forward, Yahoo! fortunes in the search market largely rest with Microsoft. There is a current 10 year collaboration that has seen the incorporation of Bing, a Microsoft search engine, into Yahoo! search and marketing strategies. As long as Yahoo! can maintain some significant market share in search, it can continue to build out the intellectual property and content business that it needs to transform itself.
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