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Summary

  • While Yahoo still has a dominant media presence in finance and sports, Mayer is also building Yahoo's position in social and apps.
  • Marissa Mayer has a strong grasp of what Yahoo needs to move forward.
  • Given the 15% decline the stock has suffered in recent weeks, I see this as a strong buying opportunity.

Yahoo (NASDAQ:YHOO) will report first-quarter earnings Tuesday. With constant news surrounding a possible IPO for Alibaba, in which Yahoo owns 24% stake, investors sometime forget that Yahoo still has strong businesses that CEO Marissa Mayer is working to grow.

There are questions with the company's direction. Investors are not sure what Yahoo wants to be. But since her arrival almost a year ago, Mayer has been working to transform Yahoo from just a media site to a true technology company. Whether through internal operations or acquisitions like Summly and Tumblr, Yahoo is quickly building its capabilities by leveraging its assets to offer high-quality services to the consumer markets and mobile devices.

While Yahoo still has a dominant media presence in finance and sports, Mayer is also building Yahoo's position in social and apps. How well these acquisitions will work remains to be seen. However, the company is also acquiring a considerable amount of engineering talent in the process - the type of talent that will help Yahoo to capitalize on future market opportunities - the type of opportunities that it missed and allowed Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) to seize.

All told, Marissa Mayer has a strong grasp of what Yahoo needs to move forward. On Tuesday, she's certain to be pressed for details. The Street will be looking for 37 cents in earnings per share on revenue of $1 billion. According to some estimates, both figures are expected to be flat on a year-over-year basis.

But this will be an improvement, considering over the previous four quarters, Yahoo has posted year-over-year revenue declines by an average of 2%. The biggest drop was 7% in the second quarter. For the fiscal year, analysts are expecting earnings of $1.23 per share, while full-year revenue is projected to roll in at $4.49 billion.

Bears are quick to point out how Yahoo's revenue underperforms Google (GOOG, GOOGL) and Facebook - particularly how Facebook has grown its revenue since its IPO two years ago. I won't disagree that Google and Facebook have meaningful leads in areas like advertising and mobile traffic. In fact, I would even throw Twitter in that category, as well.

Nevertheless, I believe that with the addition of properties like Tumblr and the $40 million deal for Xobni, it's no longer far-fetched to suggest that Yahoo can recapture the market share loss it suffered at the hands of Google over the past 10 years.

Likewise, it doesn't pay to bet against Yahoo's recent past. While the company has not had a strong track record for extracting value from its acquisitions, Marissa Mayer was not a part of that history, either. It's also encouraging that Mayer shows that she is not afraid to take on Google, Facebook or Twitter, or any other competing platforms.

Given the fact that Yahoo still brings hundreds of millions of unique visitors every month to its email, sports and business franchises, she's developing ways to monetize this traffic going forward. To that end, it doesn't work to judge Yahoo on metrics that may not matter in a couple of years.

The fact is, Yahoo is still in the early stages of its rebirth under Mayer. Despite an expected dip in profit, analysts are generally optimistic about Yahoo's future. 52% of analysts who cover the company rate Yahoo as a buy.

Given the 15% decline the stock has suffered in recent weeks, I see this as a strong buying opportunity. Yahoo still has the ability to post growth in key areas like online advertising and mobile monetization. The current stock price assumes Mayer won't figure it out. Accordingly, I still see 20% of unrealized value in this stock on the basis of improved free cash flow growth and revenue growth.

Source: Why Yahoo Is Heading To $40