Yahoo - The Right Time To Make A Move

| About: Yahoo! Inc. (YHOO)

Yahoo! Inc. (NASDAQ:YHOO) is a technology company that was created in 1996. The company mainly generates revenues from two reportable segments: consumer business and marketing solutions business and 61% of the revenues is derived from the marketing solutions business.

The company released its fourth quarter earnings on January 28th after which the stock price decreased. The price decreased despite the fact that the company beat analysts' expectations so I believed this required a thorough investigation. My investigation revealed that the key business of Yahoo is experiencing a narrowing revenue base.

Comparing the performance of the company with analyst expectations we see that the company surpassed expectations by reporting $0.46 per share profits compared to analysts' expectations of $0.38 per share. Excluding Traffic Acquisition Costs (ex-tac), the company met the revenue expectations for the quarter at $1.2 billion, 2% below the revenue generated in the same quarter last year. The full year revenue of the company declined 1% since last year.

Comparing 2013's income to last year's indicated a 4% increase primarily as a result of operating cost reductions. However, income from the continuing operations figure was 8% higher during the fourth quarter of last year compared to 2013.As far as the earnings from equity are concerned Alibaba and Yahoo Japan combined elevated the overall equity earnings of Yahoo by approximately 50% compared to the fourth quarter of last year.

The drop in price is explained by the company's lower future forecast compared to what analysts had projected. The company believed it could generate a net income within the range of $130-170 million while analysts had much higher expectations. Further downward pressure on price came from the lower ex-tac revenue projection. The company projects it can squeeze about $1.06-1.1 billion ex-tac revenue this quarter while analysts' forecast stood at $1.08. The disappointing outlook led to a drop in price of about 3% after the earnings release.

Marissa Mayer, the Yahoo CEO and a former Google employee, is overhauling the operations of the company and is mainly focusing on traffic generation to enhance the company's revenues. She has made investments in engineering and is unearthing new ways to boost and retain traffic on the company's website and other services. Treading on with this mindset, she has quit a few underperforming services, made a number of acquisitions in terms of mobile apps, and acquired the social media blogging website Tumblr. Even so, the company will have to struggle to attract users to its advertisements since Yahoo apps are not pre-installed on mobile phones and tablets like Google. Moreover, the company is adhering to a traditional approach to advertising in the face of a revolutionizing industry that now favors real time bidding platforms. Considering the large scale operations of Yahoo's advertising department it will be hard to shift to a new advertising phenomenon overnight.

Over the past few quarters, Yahoo has acquired quite a few mobile apps, including an iOS app, to increase its reach to consumers. The recent acquisition target is Tomfoolery, an app maker that builds apps to improve collaboration and communication in the workplace. It is highly likely that Tomfoolery will soon become a part of the company. Mayer is modifying the company's reporting and communication design to emphasize on a more direct way of communication. The acquisition might be intended for internal use though it is uncertain as of now.

Furthermore, the company launched a new Yahoo Mail, Yahoo Finance, and Flickr Photo books interfaces that led to a rise in overall traffic on Yahoo websites but the revenue base still remained stagnant. As of recent December data reported by ComScore, Yahoo beat Google, Microsoft, and Facebook by attracting more than 195 million unique visitors from across the United States and this data figure relates to just desktop computer users. This number is expected to rise even further in 2014. Among other content, sports content plays a key magnetizing role in attracting sports fanatics to Yahoo's website. In October ComScore's data revealed that Yahoo drew approximately 57.4 million unique users looking for sports news with average time spent at a little over an hour. The traffic numberis just short of ESPN. Considering the fact that two huge sports events, the 2014 Sochi Olympics and FIFA World Cup 2014, are just around the corner the traffic on Yahoo websites is expected to swell even further.

The company is now becoming more focused on ad-revenues and shifting its focus from search engines, where Google is the leader of the $1.9 billion industry. Yahoo's ad business is expected to rise by 4% within the US this quarter which is below the industry average growth in this segment but indicates a gradual shift on the part of the company.

Another point of concern is the declining revenue base of Alibaba, the Chinese e-commerce company that is considering an IPO next year. Yahoo has a 24% stake in the company therefore any decline in the top line of Alibaba will have a significant impact on Yahoo' top line. Yahoo's stock price increased by approximately 42% last year owing to its investment in the Chinese company and now that the margins of the company are slumping rapidly Yahoo's future outlook becomes uncertain. Although Alibaba's revenue base surged by 51% this quarter the worrisome factor is the fact that its revenue growth has declined significantly compared to the last few quarters. Alibaba showed a 61% revenue growth last quarter and 70% revenue growth the quarter before that.

Owing to the fact that Mayer is rapidly changing the internal design of the company and adding a number of new arenas into the company's operations to boost its margins I believe that the company's revenues will begin to increase by the end of this year. The turnaround is likely which is evident by the rising traffic number. Pre-installed Yahoo apps in smartphones and tablets are a possibility in the near future since the company has not yet finished its "acquisition spree".

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.