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Yahoo! Still Has Great Upside Potential

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Yahoo!’s (NASDAQ: YHOO) second-quarter earnings, released mid-July, prompted mixed reactions from the market. Critics pinned the 46% year-on-year uptick in earnings solely on the Alibaba investment, arguing that the real headline was the overall 7% dip in revenue. As usual, a few commentators went on about how CEO Marissa Mayer was to blame and how she had done nothing but dig a deeper hole for Yahoo!. While Yahoo!’s digital ad business has not grown as impressively as expected, there are a lot of indicators that signal Yahoo!’s ability to emerge ahead of the competition in the long run.

The digital ad business is about to change drastically and it is the company with its foot in the future that will experience the best growth going forward.

Don’t fall for the milking strategy

Insiders at big companies like Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB) know it; there is an impending huge paradigm shift in the digital ad industry. In view of this, both companies are making the necessary changes in the background. In the foreground however, they are adopting what business experts refer to as the "milking strategy," which is essentially giving more priority to short-term revenue in view of an imminent decline.

Facebook, for instance, has made impressive inroads in the mobile ad business. In the past quarter, mobile ads generated 41% of the total revenue. This was a huge improvement from 14% in the year-ago quarter. Users are now more open to the idea of accepting marketing messages in their news feed. This is working out well for Facebook as most of its mobile users check in several times a day. In fact, SocialCode CEO Laura O’Shaughnessy contends that other social sites like Twitter have seen an uptick in ad revenue through the use of a similar approach, reports Bloomberg. Despite this being good news in every respect, it is a transitory strategy. The broader strategy is Facebook graph search. It is Facebook’s ticket into the future of ads.

In the second quarter, Google posted a 19% year-on-year rise in revenue to bring in $14.11 billion. It missed analysts’ estimates of $14.46 billion, as cost per click, the average price it charges on ads, fell 6% year-on-year and 2% sequentially. Google’s decline in the ad business is already setting in, as signaled by slowing growth. In view of this, it is working on ways to milk its current ad model while it establishes a model that will survive in the future. Google+, personalized mail (organizing mail in tabs) and the whole idea of a comprehensive Google account are just the beginning of this new model.

Personalized ads are the future and Yahoo! has a foot in there already

Notice Facebook’s emphasis on graph search or searching through interests. Notice that Google+ is largely emphatic on sharing primary interests without the distraction of ads. Both Facebook and Google know that personalized ads are the future. They therefore need to create matrices that profile users and allow them to cluster users based on interests. If this pulls through, ad targeting will go to a whole new level as the whole idea of a personalized web with ads that present a service will come into greater focus.

Yahoo! however is already in the future and it is only a matter of time before things fall into place. If you look at Mayer’s acquisition spree, you will notice a pattern. Mayer set things rolling by paying around $10 million for Stamped, a social mobile review app. Next, she went for OnTheAir, which did video chat hangouts. Others in the long list include Jybe+, a social recommendation site, and even Loki Studios, which creates mobile games using real world data. Apart from the obvious slant toward mobile, all the companies seem to target niche markets. In some of the acquisitions, Yahoo! killed the product and retained the talent. It will use these employees to filter through the grass roots and establish products that appeal to all sorts of internet users. As far as the push for a personalized web goes, Yahoo! has an impending runaway victory bubbling beneath the surface. This will be a huge game changer for its ad business as advertisers are moving budgets away from premium inventory suppliers to cheaper, more efficient platforms that present audiences with guaranteed interest. Platforms with homogeneity in interests will attract advertisers going forward. This is what Yahoo! is pushing for. In addition, it will be able to leverage its huge user base to breathe life into its promising product pipeline. And with the pace at which things are progressing, especially with the renewed coherence in the workforce, Yahoo! will definitely succeed at roping in advertisers in the long run.

Conclusion

Yahoo!’s 87% gain on the stock market over the past year isn’t exactly a slam dunk, but rather a signal of how things will progress. It is still not too late to establish a long-term position in the stock. It is a strong buy with huge upside potential.

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Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google. 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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