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Since Yahoo (NASDAQ:YHOO) hired Marissa Mayer as CEO, Yahoo has been in a steady incline as visible below.

(click to enlarge)

At first glance this looks like a stock everyone should invest in. However, what is Yahoo's ultimate prospects in regards to revenue potential? A series of important considerations need to be made before investing in Yahoo.

Apples to Oranges (Tech Stocks)
When doing any valuation of a stock it must be realized that profitable tech stocks will more then likely always float higher then their books by a fair margin and there is very legitimate reasons for this. First they almost always generally have higher profit margins, and secondly, only 34.3% of the world is using the internet. This is an important consideration because that means every internet company could potentially have the ability to grow as internet usage increases.

Traffic is Liquid

Traffic on the Internet can float to one service to another quite easily, there is very little stopping a person from typing in yahoo.com into their browser versus google.com. Worse, these services are free so that means there is no sunk cost that would add a layer of retention. The only reason a search engine will maintain traffic is that humans are creatures of habit.

When it comes to companies like Yahoo, traffic is king. That said while the above chart is interesting, it is probably not as valuable as this one.

(click to enlarge)

Yahoo has been very slowly gaining market share since December of last year. If we do an average over the 12 months we get around a 0.16% gain per month. The implications of this cannot be understated. That means in the next 12 months Yahoo could go from 7.57% to almost 9.57% assuming linear growth as opposed to exponential (which is often more common when it comes to traffic).

All Things Being Equal
The fact that Yahoo is quietly gaining traffic is the first sign that Yahoo could catch everyone further off guard. To put this in perspective, over the same time frame Microsoft's (NASDAQ:MSFT) Bing has only gained 1.14%. That means Yahoo is gaining traffic at almost double the rate of Bing.

Though it can only ever be a rough approximation, we know that both Yahoo and Google (NASDAQ:GOOG) generate sales from ads. So using that as a base we could do some hypothetical estimates for revenue growth for Yahoo.

Google's Revenue for the last 12 months has been 47.45B, and they control 84.14% market share. If we assume for the sake of forecasting that all their revenue at some point can be correlated to their traffic, they make roughly 0.56B or 560 million per percent. Hypothetically this means in the next year Yahoo could see potential revenue increases of around $1 billion.

This is all assuming conservative growth rates. The kicker is that Yahoo is trading at a Price to Book of 1.49, it's incredibly close to parity and its price to book has been on a decline since 2008. Google's price to book is 3.471. It stands to reason that Yahoo's strong push up starting from September came from a bounce caused by their price to book getting to a new low of 1.213.

Growing EPS, low price to Book, and increasing revenue potential. If you're into value tech stocks, I think Yahoo is a prime choice. Even with their recent steep incline, there is still plenty more upward movement potential.

Outlook
Conservatively Yahoo will rise at least 25% over the next year simply based on traffic. However, there is a very strong possibility that as Yahoo continues to grow market share people will become aware of how under valued it is and might send the price galloping to meet up with Google's PE and Price to book. What I can't be totally sure of is how Yahoo's market share gain will affect both Google and Microsoft, but it most certainly won't be positive.

Source: Yahoo Is A Value Dream