Yahoo (NASDAQ:YHOO) is getting bigger before it gets better. According to Q1 earnings report released after the market closed on Tuesday, the company gets better in terms of earnings, up 36 percent, but smaller in terms of sales, down 7 percent.
This strategy is certainly a departure from the old strategy whereby the company was growing bigger by acquiring one start-up after another. Between September 1997, and April 25, 2011, Yahoo acquired 64 companies, often paying a hefty premium like the $5.7 billion it paid for Broadcast.com and $432 million for eGroups. The problem, however, is that most of these companies were in the wrong space, as Yahoo has failed to expand its presence in mobile search and the social media.
Expanding in the wrong direction, Yahoo failed to compete effectively against Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB). In addition, Yahoo did fail to achieve "economies of scale," the benefits associated with the large size. This can explain why the company has failed to boost its top and bottom lines, disappointing its stockholders. Since the hiring of a new CEO Marissa Mayer last July, things have changed, however. Yahoo's stock has rebounded nicely, trading near a 52-week high.
Mayer has taken a number of additional steps to move the corporate ship in the right direction: mobile Internet, where growth is - in 2011 global mobile internet subscribers per 100 people increased by 87 percent, compared with 8.5 per 100 people of traditional Internet. Specifically, Mayer wants to personalize the Internet, from search, to content distribution, to ads, and e-mail (as she did recently).
What should investors do with the stock at this point?
It depends on the investment horizon of each investor. Short-term oriented investors may want to stay on the sidelines until there is better visibility about the results of the new strategy. Long-term investors may want to stay with the stock, as it trades at a low multiple, below that of Google and AOL (AOL); it has reasonable operating margins; enjoys a strong industry franchise.
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
*Fye Sep 24, 2013
+Fye Dec 31, 2013
A few words of caution: Yahoo still suffers from early leadership missteps and is open to competition from Google and Facebook (see SWOT analysis below).
Yahoo's SWOT Analysis
New leadership; strong branding; economies of networking
Still suffering from early leadership missteps; a late mover in mobile Internet
Plenty of room to grow - the company is still in the early stages of expansion in the fast growing mobile space
Competition from Google, AOL, and Facebook
The bottom line: With a strong franchise, sound fundamentals, and a new leader who moves in the right direction, Yahoo has a good chance to rise again. Long-term investors may want to accumulate the stock, but always keep an eye on the rapidly changing technology landscape where winners quickly become losers.
Disclosure: I am long YHOO. 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.