Yahoo Could Become Mobile Force

| About: Yahoo! Inc. (YHOO)

Yahoo (NASDAQ:YHOO) is currently up 17.49% year-to-date, trading at $23.71 on a 52-week range of $14.59 to $23.88. Analysts give the stock a mean one-year target estimate of $22.76, but I say that is too low. I think Yahoo is in a great position to outperform the market and eventually earn a modest annual return.

Yahoo may not be the powerhouse it once was -- I mean, how many people use Yahoo email addresses, or go to Yahoo to search? -- but it has its hands in the right pies. For instance, Yahoo powers a lot of the content on Apple (NASDAQ:AAPL) products, like weather and stocks. Yahoo's Flickr also has a prominent place in Apple's iPhoto and Apple TV, allowing users to share photos with Flickr or, in the case of the latter, even stream a Flickr account as a screensaver.

In fairness, I don't think the company will ever have a role like it once it once had -- the market is different now, and the idea of a homepage that displays a sampling of information is just not as big -- but a comeback could definitely happen, especially with Yahoo CEO Marissa Mayer at the helm and, more specifically, her strategy to transform Yahoo into a force within the mobile software market.

At the World Economic Forum in January, Mayer explained that there is a trend toward mobile devices in play right now -- she highlighted the fact that the number of mobile phones and smartphones in use has tripled over the past five years and tablets are set to outsell laptops this year if predictions hold true -- so it is important to understand "how these devices work, what they really provide for, how we can best meet user expectations," and how meeting those needs can best be monetized. Mayer continued to say that while "there are a lot of really interesting applications the existing on the phone, the real question is how to make money from them." She said that she is confident that when there is a shift of this nature there will be a value-added way to create that monetization -- one that is not intrusive to the user but actually adds to the experience. Adding simply that that is something Yahoo needs to work on.

And, since Mayer took the helm last summer, she has been working to do just that.

Yahoo has made a series of smaller acquisitions over the past several months, buying them for either the products created, the talent that made them, or a combination thereof. Amongst these companies are such names as Jybe, Stamped, OntheAir, and Alike.

Most recently, Yahoo bought mobile news reader Summly. The price tag was reportedly in the neighborhood $30 million for the app. Summly doesn't generate revenue. Instead, it summarizes news articles, making them easier to read on mobile devices, and allows users to search the news for specific keywords. On its blog, Yahoo says it is shutting down Summly but will incorporate its features in existing Yahoo mobile technologies.

One of Mayer's key focus points is to find ways for Yahoo to provide customized content for users -- and to my mind, brief news summaries could be a huge step in that direction, and it is only the most recent. According to the Wall Street Journal, the company is also reportedly in talks to buy video sharing website Dailymotion. The site is much like Google (NASDAQ:GOOG)'s popular YouTube, only smaller.

The key advantage here is that, while Dailymotion is only ranks 22nd in popularity in the U.S. amongst video sharing sites, it is the 12th largest video site in the world -- a fact that could be a huge boon to Yahoo, which currently receives roughly 70 percent of its revenue from the Americas. Expanding its presence in foreign markets is bound to increase revenue.

That's not to say Yahoo doesn't have some pitfalls to watch for -- namely search and ad revenue sources.

According to comScore, Yahoo had just 12.2% of the search engine market as of the end of December, coming in third behind Microsoft (NASDAQ:MSFT) Bing's 16.3 percent and Google's 66.7 percent respective market shares.

As of the end of 2012, Yahoo was seeing a modest improvement in search ad revenues -- and Bing played a part in that. Yahoo search is partnered with the Microsoft search engine. Under the terms of the ten-year deal between the two companies, Bing runs Yahoo's search engine in exchange for 12 percent of the revenues that Microsoft earns from searches on Yahoo's sites and a tag that says "Powered by Bing". However, Yahoo lost some ground in its display ad business, which accounts for roughly 40 percent of its total revenue.

That said, I think Yahoo is in an investment phase and that it will eventually bounce back; the company's revenue growth is low right now compared to its industry, and earnings per share declined, but its return of equity is improving and it has profit margins above that of the industry average. Yahoo has enjoyed a nice gain over the past year, but there is really no reason it won't go higher. Aside from Mayer's strategy in play, the company is priced low, at only around seven times its earnings -- so there is definitely money to be made down the line. While I doubt Yahoo is going to be an overnight turnaround success, I do expect modest but consistent improvements -- both in Yahoo's product offerings and its share price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.