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Yahoo (YHOO), which competes primarily with Google (GOOG), Microsoft (MSFT), AOL (AOL) and New York Times (NYT) in the display advertising market, recently announced its results for the second quarter of 2010. Headline news: Display advertising revenues increased 19% year-over-year and 5% sequentially.

Lately, Yahoo has been increasing its focus on social networking functionality, an area where it lags behind market leader Facebook. We believe that Yahoo’s recent acquisition of Citizen Sports, integration with Facebook, and partnership with the popular social gaming site Zynga will boost traffic and user engagement levels. In turn, this should further benefit Yahoo’s display ad business. Our analysis follows below.

Social Networking Could Boost Monthly Uniques

We expect Yahoo’s monthly unique visitor tally to increase from 560 million in 2009 to around 650 million by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own unique visitor estimate for Yahoo and see how it impacts the company’s stock price.

If Yahoo successfully taps the booming social networking market, however, it could attract many more users to its site. By comparison, Facebook built an audience of more than 500 million monthly unique visitors in the first six years of its existence.

There could be an upside of 5% to the $18.64 Trefis price estimate for Yahoo’s stock if monthly unique visitors increase to 800 million instead of the 650 million that we forecast by 2016.

Below we discuss some of Yahoo’s recent efforts to enhance its appeal as a social networking destination.

1. Citizen Sports acquisition

Citizen Sports is a social gaming website. Users can play virtual versions of numerous sports, including Fantasy Football, interact with their friends, get score updates and so on. According to Yahoo, Citizen Sports attracts 39 million unique visitors per month in the US.

2. Facebook integration

Yahoo and Facebook recently struck a deal that allows users of the two services to link their accounts. Facebook users can link their accounts with more than 15 Yahoo sites, including Yahoo Mail, News and Messenger, in order to share updates with their friends. It will be interesting to see whether Yahoo can leverage Facebook’s massive audience to attract more unique users to its sites.

3. Zynga partnership

Another noteworthy recent partnership is with the social gaming site Zynga, which offers popular games like Farmville and Mafia Wars. This partnership will enable users to play Zynga games across Yahoo’s properties, including the Yahoo homepage.

Disclosure: No positions

Source: Yahoo Could See 5% Upside From Social Networking