Yahoo (NASDAQ:YHOO), which makes money through contextual search advertising, has seen its ad revenue per 1,000 searches (RPS) fluctuate in recent years. Our estimates have indicated that Yahoo’s RPS grew until 2008 and has since declined due to the weak ad market. In the future, we expect factors such as price inflation, growth in mobile searches and optimization of e-commerce websites to boost Yahoo’s revenue per search.
Yahoo competes primarily with Google (NASDAQ:GOOG) and AOL (NYSE:AOL) in the search market and partners with Microsoft (NASDAQ:MSFT) which operates the Bing search engine. We currently have a Trefis price estimate of $19 for Yahoo’s stock, about 34% above the current market price of $14.
Yahoo-Microsoft search alliance
Yahoo and Microsoft announced their search alliance in July 2009. It received the necessary regulatory approvals earlier this year. According to the terms of the 10-year deal, Yahoo will use Microsoft Bing technology for search, while receiving 88% of search revenues generated through its own sites during the first five years.
We estimate that Yahoo’s Revenue per Search has remained in the range of $20 to $25 historically . Microsoft has been working closely on its ad ranking algorithm, which should improve ad relevancy on Yahoo’s search platform when a user conducts a search. Increasing rates at which advertisers are willing to pay for each lead (click) should also benefit Yahoo. The number of searches conducted on PC-alternatives like mobile phones and smartphones can lead to higher click-through rates, thereby driving revenue per search. In addition, optimization of e-commerce websites will improve conversion rates and enable merchants to bid more for each click.
The average of Trefis member forecasts for Revenue per Search indicate an increase from $17.50 per 1,000 in 2010 to $19 per 1,000 by 2016, compared to the baseline Trefis estimate of an increase from $18.60 per 1,000 in 2010 to $21 per 1,000 by the end of the Trefis forecast period. The member estimates imply a downside of 2% to the Trefis price estimate for Yahoo’s stock.
1. Revenue per Search is calculated as: Yahoo Search Net Revenues / Yahoo Internet Searches. Yahoo reports Owned & Operated (O&O) Search revenue in its quarterly earnings. We have accumulated Total Internet Searches data from Comscore and other publicly available information.
Disclosure: No positions