Is Yahoo's Turnaround Destined To Fail?

| About: Yahoo! Inc. (YHOO)


Yahoo is not making significant progress in advertising, as its recent results suggest.

Yahoo is facing intense competition from Facebook and Google, which are speeding ahead in display ads.

Yahoo's bottom line is expected to grow at a slower rate in the next five years, indicating that it isn't a good investment.

Yahoo's (NASDAQ:YHOO) turnaround is not moving in the right direction. The stock has already taken a massive beating this year, and the recent second-quarter results aren't going to change anything. The company missed estimates on both revenue and earnings, effectively bringing an end to the hype around the turnaround that has been in progress for two years now. Yahoo's advertising business faltered, and revenue dropped from the prior year-period. Now, due to stiff competition from Facebook (NASDAQ:FB), it will be difficult for Yahoo to get back on its feet.

Gloomy times ahead

The stock has dropped 18% so far in 2014, and with the way things stand, it could get worse. According to a recent report by eMarketer, Yahoo stands nowhere close to Facebook and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) in display advertising. As reported on

"Although Google is the $4 billion darling of the US display ad space, players like AOL, Amazon and Facebook are closing in on that share.

Most noticeably, Facebook, which for the first time last quarter served more ad impressions on mobile devices than on the desktop, experienced a 50.5% increase in US digital display ad revenue last year to Google's 33.3% growth rate, according to eMarketer.

If eMarketer's estimations are accurate, Facebook has already pulled ahead of Google in US display ad spend. Although Facebook was nipping at Google's heels in 2012, totaling $2.18 billion in display ad revenues to Google's $2.26 billion, the social platform pulled ahead of the search giant last year totaling $3.28 billion in display ad revenue to Google's $3 billion.

Fast forward to the end of this year and Facebook is expected to reach some $4.8 billion in digital display revenues to Google's $4 billion. This is a markedly higher estimation than one year ago, when eMarketer forecasted Facebook would generate $3.35 billion in digital display ad revenues by the end of 2014."

Where does Yahoo stand in this mix? A New York Times article will make things clearer:

"Yahoo's revenue from its display advertising business fell 8 percent last quarter, to $436 million, compared with the same quarter a year ago, in large part because Google and Facebook continue to capture ever larger shares of the United States display ad market.

Yahoo, once the top seller of display ads in the United States, is projected to drop to 6 percent market share, from 7.1 percent market share last year, even though the overall display ad market is expected to grow by 23.8 percent this year, according to eMarketer."

As such, Yahoo will find the going difficult in the advertising market. However, the company is trying its best to find growth in the mobile segment, and it has made a number of acquisitions in the past to address this area.

Strategies aimed at improvements

Yahoo recently acquired Aviate as a part of its efforts to accelerate mobile search as a contextual personal home screen product for Android users. Now, it is witnessing users interacting with the new Yahoo! Aviate on an average of 50 times a day.

The mobile display revenue and mobile search revenue of Yahoo grew more than 100% on a year-over-year basis in the quarter. Yahoo is integrating relevant information like event invitations, upcoming flights, packaged tracking data, and more into the search experience. This kind of integration is expected to bring a unique value proposition to millions of Yahoo users, leveraging the company's scale and longstanding market position, in addition to improving the user experience.

Yahoo has added one minute of time spent per user per day on the iOS app, which has increased the page views by over 70% as compared to the previous mail app. The time spent per user on Android is believed to have increased by 65%.

Yahoo is investing heavily to renovate its ad technology in order to simplify its advertiser offerings across the Yahoo network, and to improve opportunities for buying ads systematically. The company has launched Yahoo Prime View, which is a new ad product that provides brands the ability to run display campaigns at a 100% viewability rate on Yahoo. This product is considered as a crucial step towards creating a simple, transparent advertising ecosystem, allowing brands to understand the real impact of their media investments.

Not a good investment

Clearly, Yahoo is making impressive investments in ad technology to drive growth. However, the company's market share in advertising is expected to decline this year, as the New York Times article shows us. So, the fact that Yahoo's ad business is declining in a rapidly growing market is a big red flag. Of course, the company is making solid investments in mobile and is seeing user growth, but monetization is still a problem.

Yahoo's bottom line is expected to grow at just 10% a year for the next five years, which is way below the growth of 32% a year seen in the last five. So, investors should consider staying away from Yahoo, as the company is facing intense competition and it can drop further going forward.

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.