Yahoo Faces 10% Downside Should Ad Rate Declines Continue

| About: Yahoo! Inc. (YHOO)

Sites like Yahoo (NASDAQ:YHOO) earn money from display ads (banners, skyscrapers) and often measure the health of their ad business based on the amount of ad revenue they generate for each viewed page on their site. Yahoo’s revenue per page view (RPM) has declined over the past few years and there could be a 10% downside to the $21 Trefis estimate for Yahoo’s stock if RPM declines were to persist into the future.

Display Ad Business is 16% of Yahoo

We estimate that Yahoo’s display advertising business constitutes 16% of our estimate for Yahoo’s stock, making it the second most valuable business for Yahoo after search.

30% Decline in Revenue per Page View in 3 Years

Yahoo’s RPM declined nearly 30% from $1.33 per 1,000 page views in 2006 to $0.96 per 1,000 page views in 2009. The display advertising market, however, showed a strong comeback in the last quarter of 2009, saving Yahoo from even greater RPM declines.

2 Reasons Why Revenue per Page View Should Increase

We believe that RPM rates will increase to reach $1.31 per 1,000 page views by the end of the Trefis forecast period due to:

1. Increase in online brand spending by advertisers

Advertisers are increasing their brand marketing on Yahoo sites, with 9 out of 10 advertising categories seeing a rise in online spending during Q4 of 2009. For example, retail, consumer products and telecom advertising categories grew strongly compared to the same period last year.

2. Ad dollars shift from print to online

Yahoo’s RPM is highly dependent on how much money is spent for online advertising. We expect online advertising to continue to take away share from traditional media like print newspapers and magazines as consumers increasingly shift from print to digital media. Such a shift will directly benefit online news and content sites like Yahoo and AOL .

10% Downside to Trefis Estimate if Decline Were to Continue

Despite our forecast, an on-going decline of RPM rates in line with the recent years could results in a $2 (10%) downside to the $21 Trefis price estimate for Yahoo’s stock. You can modify our forecast above to reach $0.5 per 1,000 page views by the end of Trefis forecast period to see the impact on Yahoo’s stock.

Disclosure: No positions.