Yahoo: Can An Old Dog Learn New Tricks?

| About: Yahoo! Inc. (YHOO)

Every so often, a professional athlete defies the odds and Father Time to put in a productive season when he should be getting ready to retire. Though in some of these cases performance enhancing-drugs helped, football players like John Elway and Brett Favre have managed to stave off retirement by putting up strong numbers in their late 30s and even 40s.

If Internet companies were professional athletes, then Yahoo! Inc. (NASDAQ:YHOO) would be akin to the aging superstar who can still play at a top level.


Yahoo was one of the early entrants in the 1990s when the commercial potential of the Internet was coming into focus. It survived when others failed when the technology stock bubble burst in the early 2000s.

Yet Yahoo looked to be on verge of retirement as it went the last four years without an increase in revenue. The past three years have been a roller-coaster on net income as well, going from $600 million in 2009 to $1.2 billion in 2010, back down to just over $1 billion in 2011.

New Leadership

Then under the leadership of new CEO Marissa Mayer, Yahoo reported in late January a modest 2% hike in annual revenue for the past year. It also bested analysts' earnings estimates of $0.28 a share by posting a profit of $0.32.

Since Mayer's appointment in July 2012, the stock price is up 30%, trading at around $20 a share. Even with the increase, Yahoo is selling at a pretty low price-to-earnings ratio of 17, compared with an industry P/E of 35.4. And while its five-year average returns on assets and investments lag the industry, its 12-month returns in those categories both nearly doubled the industry, a sign the company is moving in a better direction under its new leadership.

The Future

The challenge for Yahoo is not getting people to its website and access its content (after all, it boasts about 700 million monthly users on average), but rather generating revenue from those users. Just as the industry figured out how to make money on advertising from traditional websites, the migration to tablets and smartphones is challenging companies like Yahoo on how to do the same with mobile websites. While Internet advertisers spent $17 billion in the first six months of 2012, mobile advertising revenue nearly doubled to $1.2 billion during the same period.

Mayer has told analysts and investors that mobile technology will be a strong emphasis. It recently acquired a pair of app developers. It made significant improvements to two of its core products: Yahoo Mail and Flickr, its email service and photo sharing platform, respectively. According to the company, the new Yahoo! Mail is faster, easier to use and available across the Web and on Windows 8, iPhone/iPod touch and Android. Yahoo!'s redesigned Flickr app for iPhone and iPod touch makes it easier to capture, share and discover photos. The new app allows users to share photos by email, with the Flickr community or via Facebook (NASDAQ:FB), Twitter or Tumblr.

Although about half of current Internet ad revenue 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. In a move to capture part of that space, Yahoo! last year announced a partnership with electronics giant Samsung to provide Yahoo's Broadcast Interactivity platform to Samsung's recently launched Smart TV product line.

But while mobile technology is a prime focus, it's not the only basket Yahoo is storing its eggs. It recently built partnerships with traditional media companies. A deal with NBC (NASDAQ:CMCSA) Sports is designed to deliver better content for fantasy games and video coverage of sporting events. It also teamed with CBS (NYSE:CBS) Television Distribution to launch omg! Insider, a celebrity gossip TV show that aired in TV syndication but now airs on Yahoo.

In February, Yahoo and Google (NASDAQ:GOOG) teamed up on an advertising deal that some say will generate strong revenue growth. Google ads will appear on Yahoo properties and co-branded websites. Many are skeptical, however, of this deal's success, given the dominant position of Facebook in this space.

Yahoo! also 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.

Even with the diversification, Google's core business of search engine revenue remains strong. The division accounted for revenue of $427 million for the year, up 14% from 2011.

As it continues to make deals, look for acquisitions, build its brand and improve its products and services, Yahoo will have a supply of $6 billion in cash from which to work. It also has the benefit of having zero debt on its balance sheet. It has grown its total assets by 16% in the last year to just over $17 billion.

Among its assets are ownership stakes in two key Asian properties. Yahoo owns a 35% stake in Yahoo Japan, a stake that has increased in value from $5 billion to $8 billion in just the past year. It also possesses a 20% stake in Alibaba, a Chinese e-commerce/web services company. Yahoo! sold a significant portion of that enterprise, helping it add $6 billion in cash to its books. Yahoo used $1.5 billion of that to buy back about 80 million shares.

Nineteen of the company's 25 analysts rate the stock as a hold, yet only one has a sell rating. The other five rate it as a buy or a strong buy. The average earnings estimate for 2013 is $1.11 a share, with a top estimate of $1.58.

It's still early in Marissa Mayer's tenure, but all signs seem to suggest that she is, against the odds, successfully teaching Yahoo a few new tricks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.

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