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Summary

  • Yahoo!’s turnaround is moving on at a solid pace and the company should soon return to year-over-year growth in revenue and earnings.
  • Yahoo! is laying great stress on content and mobile to provide a major boost to its business.
  • Alibaba’s upcoming IPO could give Yahoo! a lot of cash to expand and strengthen its business.

Shares of Yahoo! (NASDAQ:YHOO) have gained remarkably in the past one year, with an appreciation of more than 55%. However, the stock is down close to 12% in 2014 with the recent sell-off in tech stocks adding to Yahoo!'s woes. But then, Yahoo!'s recently released first-quarter earnings report establishes the fact that the technology company's turnaround is working out quite nicely. The share price has also gained some momentum post Yahoo!'s results, and it looks like the good times will continue in the future.

The turnaround is progressing well

Yahoo! started off fiscal 2014 on a strong note with revenue and earnings coming in ahead of estimates. The tech giant managed to arrest the drop in revenue from its display and search ad businesses, while the planned initial public offering of Alibaba further added to investors' confidence about Yahoo!'s performance going forward, since it holds a 24% in the Chinese company.

Yahoo!'s gradually getting stable and early signs of growth in its core business are encouraging. The company's growth is being driven by a couple of major factors. First, its search revenue is gradually gaining steam, growing 9% year-over-year in the previous quarter, marking the ninth consecutive quarter of growth. Second, there was significant growth in Display revenue, excluding traffic acquisition costs, for the first time since 2011.

Mobile and content to drive the business

Yahoo!'s mobile business has been key to the company's newfound success in its search and ad businesses. Mobile is a key area of investment for Yahoo!, with solid returns in terms of users, traffic, and revenue. Unsurprisingly, Yahoo! believes that mobile is the future of its business, which is why it is making full use of its acquisitions to make the most of this platform. Yahoo! had acquired Summly a year ago, and immediately integrated that technology into the Yahoo! app. Now, it is leveraging the Summly technology in the next generation of Yahoo! News Digest. It launched News Digest at the beginning of January on iOS in the U.S. and launched in the U.K. six weeks later.

Yahoo! is focusing on integration of today's news in this world of infinite information, and the product has received tremendous response with 40% of downloads becoming daily active users. Its commitment to iteration and innovation has strongly pushed the growth in mobile.

Moreover, Yahoo! has increased the frequency with which it updates its apps by 35% over the past year. It now releases more updates per app than any other major player in the industry. Mobile mail has also seen strong growth, with 15% quarter-over-quarter growth in daily active users.

Also, the Yahoo! app is among the leaders in the news ad category, ranked number one on Apple's (NASDAQ:AAPL) app store and number two on Google (NASDAQ:GOOG) Play. The daily active users have tripled since its launch last April. Moreover, the weather app has also performed strongly with terrific growth in daily active users since launch and nearly 50% growth in the last quarter alone.

Finally, Yahoo! reported robust mobile traffic with more than 430 million monthly mobile users, a growth of 30% from last year. It is focused on being on mobile first with more than half of Yahoo!'s total monthly audience joining on the mobile device.

The growth in mobile search is an important part of Yahoo!'s long-term strategy. It witnessed nearly 100% growth across almost every measure of its mobile search business last quarter. So, it is investing heavily in the future of mobile search.

Last quarter, Yahoo! announced the acquisition of Aviate, whose technology will play a central role in the future of contextual, personalized mobile search at Yahoo! In February, it announced the partnership with Yahoo! Now that will facilitate users searching for their local business in the U.S. to immediately see user reviews, business information, and star ratings from Yahoo!.

In Q2, Yahoo! will focus on investing and strengthening the performance and efficiency of the mail platform. In Q1, Yahoo! also announced a partnership with Vevo, home to a large collection of music videos, with more than 90,000 in total. Yahoo! is also looking to make its presence felt on other platforms as well. For example, it had launched Yahoo! Screen on Apple TV late last year, and this quarter, it launched Yahoo! Screen on Roku.

Alibaba could be a big boost

Finally, the initial public offering of Alibaba is expected to be a big windfall for Yahoo!. Alibaba is a fast-growing business and Yahoo! has a 24% stake in it. As reported by Los Angeles Times -

Alibaba's fourth-quarter earnings more than doubled from the previous year to $1.4 billion while its revenue surged 66 percent to $3.06 billion.

The performance reinforced hopes that Alibaba's market value could range somewhere between $150 billion and $200 billion when it goes public. That would put Yahoo in line for a huge windfall when it sells its Alibaba stake, providing money to expand its reach through acquisitions and buy back more of its stock.

Valuation and conclusion

Hence, Yahoo! is seeing gains from almost all angles, and it looks like the company will get better from here. Also, Yahoo!'s fundamentals also look strong. The stock trades at a trailing P/E of 30, while a forward P/E of 19 indicates solid earnings growth. Analysts are also quite upbeat regarding Yahoo!'s prospects, with the company's earnings expected to increase at a CAGR of 8% for the next five years. Thus, considering all these factors, Yahoo! looks like a solid investment.

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.