Yahoo! Inc.’s ($YHOO) earnings in the second quarter will coincide with the third anniversary of Marissa Mayer as Yahoo’s CEO. In the past three years the company has seen some major course correction. On one hand, the company’s stock price has tripled, and on the other hand the quarterly revenue has steadily declined year on year for most quarters. The spike in the company’s stock is due to its stake in Alibaba Group Holding ($BABA), which will yield a sizable return. However, the clock is ticking for Marissa to provide a turnaround in the core business; else activist investors would soon be after her job.
Fall in Revenues
Yahoo’s earnings are hinged on display advertisement. The biggest disappointment in the past three years has been the continuous slide in revenues, quarter after quarter, which is attributable to the fall in display advertising. This fall should continue in the near future, barring a miracle. Unless the management can find a way to stem this decline, there will be questions on how the turnaround will be possible.
Search Market Share Decline
Yahoo’s search market share saw a minor boost following its deal with Firefox where it became the default search engine on the browser. However, in the past few months, the gain through this deal has vanished and the company is again showing results equal to pre-deal time.
Fig 2:Yahoo’s market share is again moving to last year’s level. Sustainable gain through the Firefox deal has not transpired.
The last few months saw some questionable expenses made by Yahoo’s management. One was the NFL deal which will broadcast an NFL match live. The deal is valued at over $10 million and the best outcome for the deal is a zero loss for Yahoo. If it is a hit, the NFL would go for a further round of similar free to air match in the future. In this scenario, Yahoo would not be able to compete against bigger players in the market where the deal size would easily be north of a nine figure sum. In case of low or medium viewership Yahoo would hardly gain from this experiment. Similarly, other decisions like the hiring of Katie Couric for an eight figure sum can hardly be justified. Also, these expenses do not provide any medium to long term gain for the company.
This is the biggest trouble for Yahoo and the investors. Every Yahoo earnings call features a lengthy discussion on the present status of its Alibaba investment. The shares saw a sudden drop at a mere hint by an IRS official about the possibility of taxing spin-offs in May of this year. According to a “Sum of the Parts” valuation, Yahoo’s stake in Alibaba and Yahoo Japan forms a sizable chunk of its market valuation. Any decline in the valuation of these companies or a definite ruling about the taxation of spin-offs will wipe out a good amount of value from Yahoo. Investors are already jittery about the taxation issue and the recent fall in Alibaba price is also making Yahoo less attractive as an investment.
Fig 3:Yahoo and Alibaba’s price movement since Alibaba’s IPO
Clock is ticking for Marissa Mayer
Marissa Mayer took the top job at Yahoo in July 2012 and had the backing of investors. She was also fortunate to get the help from higher valuation of Alibaba, which saw Yahoo’s stock rise. However, her main job was to assure the turnaround of the core business at Yahoo and add sustainable revenue streams. She has tried this through a myriad number of acquisitions which included major names like Tumblr, Brightroll and Flurry. Over the next couple of quarters, if these acquisitions do not show a noticeable impact to Yahoo’s bottom line, there might be increasing clamour for a change in CEO. In a recent example, we saw how quickly the tables were turned on Dick Costolo at Twitter Inc. ($TWTR) when the results were not satisfactory.
Marissa Mayer will have to get the results at double speed to ensure she does not follow Costolo’s example.
Yahoo is still a very bad bet for investors considering the odds against the company and the taxation issues surrounding its spin-off. Unless the management can show some good product line which can add some sustainable revenue streams, this stock should be avoided by investors. Any further fall in Alibaba’s stock will also lead to an accompanied fall in Yahoo stock price, giving an additional reason to avoid this stock.
About Amigobulls - This is a guest post by Rohit Chhatwal for Amigobulls. Amigobulls provides original articles, videos, research, and a stock screener primarily for stocks in the technology sector.
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