The Cards Marissa Mayer Is Holding At Yahoo
Yahoo’s (YHOO) fourth-quarter results suggest that CEO Marissa Mayer, the engineering geek lured from Google (GOOG) in July 2012 for her business acumen, has once-again failed to reverse slumping advertising sales. Investors might want to consider taking profits in the eponymous Internet portal, as the stock gains of the last 18-months could prove as fugacious as the laudatory encomiums once heaped on Ms. Mayer.
Yahoo’s stock has more than doubled in value since Mayer took the helm, which analysts attribute to investor optimism over potential new earnings drivers: organic growth from increased audience visits to property revamps (Flickr and Yahoo Mail) and to new content-rich sites, featuring big-name hires like TV news anchor Katie Couric and former New York Times' technology columnist David Pogue; anticipated windfall from the potentially lucrative IPO of the Chinese e-commerce site Alibaba (in which the company owns a 24% stake); and, monetization from acquisitions, such as the $1.1 billion and $50 million purchases of social media startup Tumblr and automated movie-making app developer Qwiki last May and July, respectively.
It’s evident to all but the techno-illiterate, that Mayer has borrowed most of the plays in her game book – accelerating scale and scope of activities (search, video, and digital news content) to mobile platforms – from her erstwhile employer Google.
It will take time to for a new ad strategy (announced at the recent Consumer Electronics Show) to integrate and simplify the currently fragmented ecosystem. Nonetheless, eighteen months into her buying spree, any evidence of sustainable profitability reminiscent of Google remains as elusive as the empirical proof of Bigfoot’s existence.
Yahoo continues to fall further behind Google and Microsoft (MSFT) in organic growth for inquiring eyes (and potential customer dollars). In June 2012, the respective share of the U.S. search engine market held by Google, Bing and Yahoo stood at 66.8%, 15.6%, and 13%; data released by comScore for December 2013 showed Google and Microsoft continue gaining voice at Yahoo’s expense: Google and Microsoft expanded their market shares to 67.3% and 18.2% -- while during Mayer’s tenure, Yahoo’s market has fallen further to a 10.8% share.
Revenue slumped for the fourth consecutive quarter at Yahoo, dipping 6% to $1.27 billion in the last three months of 2013, led by a similar 6% decline in all-important display-ad sales to $491 million (as a price-per-ad decline of 7% offset a 3% increase in total number of ads).
Yahoo did report an 8% increase year-on-year in search revenue to $461 million. The all-important price-per-click metric, however, fell by about 3% from the prior year.
Company watchers are expressing dismay at potentially slowing growth at Alibaba, too, which posted “just” 51% revenue growth during the quarter to $1.78 billion compared with $1.18 billion a year prior. Though impressive, sequentially growth is slowing, as the comparable rise in sales posted in the prior two quarters was 61% and 71%.
Decelerating growth at the Asian B2B ecommerce site could adversely impact the implied worth of Yahoo’s 24% ownership stake. Nomura Securities conservatively values Alibaba at $101 billion, equating to roughly $14 a share (on an after-tax basis) to Yahoo’s current market valuation. Whereas, Cantor Fitzgerald analysts finger an IPO market cap of $150 billion (per share value to Yahoo would be about $22.50).
Despite current travails, with a user base of 800 million and traffic leadership in branded gateway properties (such as Yahoo! Finance and Yahoo! Sports, especially with legions of Fantasy league fans), the company remains a profitable concern: net earnings for 2013 were $1.37 billion.
Additionally, with liquidity of some $5 billion in cash and equivalents on its balance sheet, nominal long-term debt and trailing twelve-month free cash flow of some $786 million, Yahoo can afford quarterly setbacks as CEO Mayer moves forward with her “googled” foundation for sustainable growth.
However, with increasing social usage and related search/commerce activities rapidly migrating to mobile apps -- smartphones and tablets could potentially capture 40-45% of search queries in 2014, according to comScore -- Yahoo could find itself losing business not only to traditional competitors like Google and Microsoft but upstarts like Twitter (TWTR) and FaceBook (FB) in coming quarters too.
Yahoo’s share of search is estimated at less than 5% on mobile vs 11% on PC, according to comScore data.
A look at YCharts’ financial advisor tools suggests that by standard fundamental metrics -- here, price to sales -- on a peer-comparable basis, the valuation of Yahoo could be vulnerable to a price correction:
If Yahoo is unable to deliver on promised growth in both display and search -- and Alibaba fails to deliver on the high-end of IPO expectations (think a weakening Chinese economy?) -- 2014 could be the year that the search giant looks for its sixth CEO and investors look for the egress too.
David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.
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