Internet giant Yahoo's (NASDAQ:YHOO) shares have lost around 17% of their value so far in 2014. Although the company seems to be making good progress to improve the business, it looks like investors are not impressed. Moreover, Apple (NASDAQ:AAPL) recently dropped Yahoo's weather app from iOS 8, and has instead opted for the source of Yahoo's weather app, the Weather Channel, to provide the data. This would come as a setback for Yahoo, which is trying to make rapid strides in mobile.
As reported on Wall St. Cheat Sheet:
"Apple's switch away from the Yahoo weather app is a victory for Weather Channel CEO David Kenny and a loss for Yahoo CEO Marissa Mayer, who has been working to increase Yahoo's mobile presence and its integration with Apple products, as reported by Kara Swisher at Re/Code. Instead of taking the Yahoo weather app to iOS 8, Apple has opted to replace Yahoo's weather app - which repackaged data provided by the Weather Channel - with a new app equipped with better location relevant data and longer range forecasts, information which the Weather Channel did not provide to Yahoo."
Yahoo had been boasting about its weather app, as it had seen terrific growth in daily active users since launch, and nearly 50% growth in the first quarter alone. Hence, Yahoo will now need to step up its innovation if it is to continue doing well going forward.
A weapon in the arsenal
Yahoo holds about a 23% stake in Chinese company Alibaba (ABABA), which is going public soon. When Alibaba goes public, Yahoo is expected to see windfall gains of around $26 billion as a result of its massive stake. Now, Yahoo can use the proceeds of the Alibaba IPO to invest in product development, or rather acquire more companies, and drive its long-term growth.
Key acquisitions driving growth
Last year, Yahoo had acquired Summly for $30 million. The company has integrated Summly's technology into Yahoo apps. 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 it in the U.K. six weeks later.
Yahoo had made this acquisition to bolster its mobile moves. As reported in The New York Times, Yahoo had said:
"Yahoo said in a statement that while the Summly app would be shut down, "we will acquire the technology and you'll see it come to life throughout Yahoo's mobile experiences soon."
Yahoo has seen tremendous response with the app, with 40% of downloads becoming daily active users. As such, the Alibaba IPO will give the company more resources to acquire more companies.
Apart from Summly, in order to strengthen its mobile search, Yahoo had also acquired Aviate earlier this year for $80 million. With this acquisition, Yahoo will have an access to technology which will play a central role in the future of contextual, personalized mobile search. The technology will also allow users to search for local business in the U.S., immediately see user reviews, business information, and star ratings.
Now, Yahoo has launched the Aviate app to leverage the acquisition to its advantage. As reported on Yahoo.com:
"Aviate, the Android app that caters your home screen to the time of day and where you are, is finally opening its doors to the world. After several months in beta and being acquired by Yahoo, the app is formally launching today with a revamped look, several new features, and a new name: Yahoo Aviate.
Yahoo Aviate is a lot like the app we tested last October. It shows music apps when you're driving, news and weather apps in the morning, productivity apps while you're at work, and maybe even a Reddit app right before bed. But with the company's acquisition came a new focus on daily habits, and on showing actual content instead of apps. Where the Aviate beta showed news apps when you first turned on your phone in the morning, Yahoo Aviate shows snippets from Yahoo's News Digest app. And where the Aviate beta showed calendar apps while you were at work, Yahoo Aviate shows actual calendar entries with one-touch access to dialing a conference call number or getting directions to your next appointment. Lastly, instead of showing calendar apps, Yahoo Aviate now shows forecasts from Yahoo Weather."
Why Alibaba will come in handy
Hence, with such acquisitions, Yahoo will be able to roll out innovative apps. This is the reason why the proceeds from the Alibaba IPO will come in handy for Yahoo, as the company doesn't have an overly strong cash position if we take out the debt. Yahoo has cash of $2.94 billion, while it has debt of $1.17 billion. As such, the cash received from the IPO will come in handy as Yahoo will be able to make a higher number of acquisitions more freely.
At present, Yahoo doesn't look like a good buy from a valuation point of view. It has a trailing P/E ratio of 28, quite expensive if we consider that the industry average is less than 20. In addition, Yahoo's PEG ratio is 2.63, which further suggests that the stock is overvalued. Finally, the company's earnings are expected to grow at a CAGR of just 8% for the next five years, which is why Yahoo will need to accelerate its mobile initiative to drive growth. For these reasons, it is evident why Alibaba is important to Yahoo's prospects going forward and the company will have to use the cash wisely.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.