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Since July 2012 shares of Yahoo (YHOO) have surged by 8.9%, easily outperforming S&P 500, which is up by 1.23% in the same period. It also sold its 40% stake in China's leading B2B website Alibaba.com -- which it acquired in 2005 for $1 billion -- in a $7.6 billion deal through a complex transaction that was a result of several months of negotiations. Yahoo will use the majority of the proceeds in share buybacks and dividends.

Yahoo, unlike Google (GOOG), is an advertising firm. Google is more like a private equity fund built around its advertising platform and search engine. Recent data suggests that Internet advertisers are now spending more money than ever before, $17 billion in the first six months of 2012. But with the advent of smartphones and other mobile devices, market dynamics are changing, which is evident in the 95% increase in mobile advertising revenues to $1.2 billion -- the biggest revenue jump out of all Internet advertising segments.

Although currently almost half of the Internet ad revenues, 48%, goes into search engine advertising, it is clear that mobile and other innovative devices, such as Smart TVs, are set to play an important role in the future. There are reports that Microsoft (MSFT) gets obscene CPC rates from advertisers bidding for space on the Xbox desktop, for example, a market dominated by the lucrative 18- to 34-year-old male demographic.

In a move to capture part of that space, Yahoo has recently announced that it is partnering with the Korean consumer electronics giant Samsung to provide Yahoo's Broadcast Interactivity platform to Samsung's recently launched Smart TV product line, part of Samsung's larger strategy to build its own content-delivery ecosystem similar to that of Apple (AAPL), Google and Microsoft. The deal aims to open new doors of advertising revenues for Yahoo as the company pushes its SoundPrint technology, which it gained with the $20 million acquisition of IntoNow in 2011 that acts like a "GPS for television" and enhances user interactivity.

But that doesn't mean Yahoo is stepping away from traditional Internet display and video advertising. Five days before the announcement of its partnership with Samsung, Yahoo revealed that it has entered into a content deal with Wenner Media, the publisher of Rolling Stone magazine, U.S. Weekly and Men's Journal, whereby both companies' editorial teams will work together to promote each other's content on their websites.

However, Yahoo's turnaround is not going to be an easy task for newly appointed CEO Marissa Mayer. In its quarterly filing, the business was able to beat analysts' estimates by reporting a profit of $3.16 billion, $2.8 billion of which came from the sale of its stake in Alibaba. Excluding this one-off inflow, operating income has actually increased by just 1%. However, quarterly revenues increased by 2% over last year, a third consecutive increase. It was important for Yahoo to stop the revenue bleeding.

Yahoo's move to divest from Alibaba, which was brokered about two years before Mayer's hiring, was a good decision as it not only allows the company to focus more on its core offerings -- search, email, and its finance brand -- but it gives the business some cash to invest in mobile and cloud computing, an area in which Yahoo is far behind its rivals Google and Microsoft. Furthermore, the company is also shutting down its loss making South Korean operations. The business had planned to spend $2.8 billion out of the $7.6 billion in share buybacks and some small acquisitions, particularly in mobile and cloud computing. However, Yahoo needs a lot of cash to push itself forward as its rivals are quickly gaining ground in mobile and cloud computing. Spending billions in share buybacks -- rather than using them to expand the product portfolio after gutting its research and development teams over the past few years -- is very short-sighted, especially since it hasn't been able to unlock its stake in Yahoo Japan to raise more cash.

The CEO's first move, following the Alibaba sale, was to buy out the mobile app developer Stamped -- not for the app itself, but rather for its nine employees. Such is the state of Yahoo's human resources problem. Accordingly, the new team will form a mobile development center, which will not only provide new and innovative apps to Yahoo, but will also hunt for new talent. Mayer has already attracted a string of well-known names, including Henrique De Castro, a Google advertising executive, as COO and Ken Goldman from Fortinet (FTNT) as CFO.

Yahoo

Google

Microsoft

YTD Stock

6.88%

0.99%

11%

P/E

5.31

20.44

15.57

EPS

3.25

31.91

1.85

Yield

N/A

N/A

3.20%

ROA

2.84%

10.50%

14.21%

ROE

28.30%

17.18%

24.50%

Yahoo has come a long way in the previous five months and it appears as if the company is on the right track. Still, it has a lot of catching up to do. It is virtually unknown in the mobile apps arena, with just 70 apps for Android and iOS under its belt. It currently has around 167 million monthly unique visitors, but it has to figure out a way to transfer its existing user base and transition them to the mobile Internet quickly. The world is moving rapidly toward mobile and Yahoo's rivals, particularly Google, are investing billions in aggressively diversifying their portfolios.

For instance, Google's investment arm, called Google ventures, recently received $1.5 billion from its parent to make hundreds of investments in the next five years. Reportedly, a substantial part of that will go into mobile. On an annual basis, Intel's (INTC) Intel Capital and Google's Google Ventures will be spending $300 million to $500 million -- and this does not include the acquisitions the companies make.

The decision-making at Yahoo's board is a very lengthy process. It not only spent more than two years making the Alibaba decision, but it is still not clear what it is planning to do with Yahoo Japan, its joint venture with Tokyo-based Softbank Corporation. More than a year ago, Yahoo mulled over the idea of selling its 35% stake in Yahoo Japan. The two organizations, Yahoo Japan and Yahoo, have a thorny relationship that became evident in 2010 when Yahoo Japan moved its search technology from its parent Yahoo to Google.

Mayer clearly has a lot of catching up to do, and there are a number of directions she can go in: buy a social network, get deeper into content creation and distribution, build a stronger mobile ad platform, etc. Yahoo has to re-energize ways to monetize its user base -- otherwise, 167 million will be just a number on a portal site. Dumping the valuable cash into share buybacks rather than focusing on expanding into new product areas might prove to be the final blunder the company makes.

Source: Yahoo's Future Begins To Take Shape