Despite Prudent Acquisitions, Yahoo A Sell

Oct. 3.13 | About: Yahoo! Inc. (YHOO)

Yahoo (NASDAQ:YHOO) has core operations in search engine services and related advertising. The company has various human-interest branches such as Yahoo News, Lifestyles, Finance and Sports. Aside from these operations, Yahoo has invested heavily other Internet companies. Yahoo!'s acquisitions include prominent sites such as, Tumblr and mobile app maker Hitpost. Yahoo also has a stake in Asian Internet giant, which is almost certain to become increasingly profitable with Alibaba's IPO in the near future. Despite such impressive investments, Yahoo is in trouble. Operating income is turning negative while competitors are in the black and growing. Though Yahoo's acquisitions may prove profitable and boost net income, investing in Yahoo is mainly about investing in the effectiveness and popularity of its search engine.

Acquisitions and Partnerships: Hitpost and Alibaba

Yahoo is prepared to purchase a sport-based mobile app developer called Hitpost. Aside from forums, polls and discussion boards, Hitpost allows members to bet on sports minutiae. For example, Hitpost allows members to bet on the probability of certain plays such as fumbles, strikeouts or how many fouls will occur in a game.

Yahoo owns a significant stake in Chinese Internet heavyweight Alibaba. There is recent news that Alibaba's fortunes are growing beyond what was expected, benefiting Yahoo. Such smart investments balance out sub-standard performance in Yahoo's primary search engine operations. Even if Alibaba grew at a moderate pace after the IPO, it can significantly boost Yahoo's fortunes.

Competitive Environment Analysis

Comparing Yaho! earnings to that of major competitors is instrumental to assessing Yahoo's position in its industry. Operating income is a good way to zero in on the profitability of Yahoo's core business. In the last ten years, the company's operating income has been discouraging. Consider the following comparison between recent operating income of Yahoo and other industry heavyweights such as Google (NASDAQ:GOOG), AOL (NYSE:AOL), Sina (NASDAQ:SINA) and Baidu (NASDAQ:BIDU). The values here are official annual operating incomes for FY 2011, 2012 and the last twelve months:

• Yahoo: 342.34M, (68.4M), (77.19M)
• Google: 13.05B, 13.47B, 13.49B
• AOL: 45.8M, 1.2B, 309.1M
• Sina: (19.92M), 8.49M, 9.94M
• Baidu: $1.23B, 1.86B, 1.96B

Yahoo shows a declining trend. This is important since net income from acquisitions and partnerships can distract from an evaluation of how well the company fulfills its stated mission. Google shows an upward, though flattening trend while AOL's operating income is sporadic and relatively small but at least in positive territory. Yahoo!s main business seems to be sinking deeper into the red.

International competitors are relevant since the Internet inevitably generates a mixture and mingling of people widely separated by physical distances. Thus, it is reasonable for U.S. companies to have to increasingly compete with Sina or Baidu. An English-language branch of Chinese search engines could conceivably threaten U.S. giants such as Yahoo or even Google. Sina appears to be climbing into persistent positive operating income, however small it may be at this time. Baidu seems even stronger, resembling a Chinese version of Google. If Baidu chose to, it could very well threaten Yahoo's market share in the U.S.


Yahoo's revenue streams can be divided into two broad categories:

1. Partnerships and acquisitions
2. Search engine/advertising

The company's most significant recent partnership is its stake in Alibaba. Though Yahoo shares have recently gone up in large part because of this deal, investors should be wary for precisely that reason: YHOO stock has already factored in optimism related to Alibaba. Hitpost and other acquisitions like Tumblr and Associated Content will no doubt bring in some money. However, given the diversity and sheer number of Yahoo's acquisitions of other sites, it is difficult to give a credible estimate of likely profits or losses stemming from so many deals.

Turning to search engine and advertising revenues, Yahoo's operating income does not paint a pretty picture. Google dominates the U.S. search engine market. In increasingly wealthy Asia, Baidu and Sina are prominent and show upward operating income trends. Investors have to remember that Yahoo could be forced to compete with the likes of Baidu no less than it does with Google. Yahoo looks like it is unable to do either. Until or unless Yahoo radically changes its search engine performance or transitions to substantially different corporate strategies and revenue sources, the company merits a "sell" recommendation.

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.