Yahoo (NASDAQ:YHOO) competes with Google (NASDAQ:GOOG), AOL and Microsoft (NASDAQ:MSFT) in the display advertising market. The company’s profit margins from its display advertisement business have declined from 30% in 2006 to around 27% in 2009, due to lower revenue by Yahoo from every 1000 pages viewed on its owned and operated sites.
We expect Yahoo’s display EBITDA margin to increase slightly in the near-term as a result of revenue growth-driven margin leverage and expected increases in monetization per page (higher RPM estimate). However, Yahoo faces heightened pressure from competitors like Google in the years ahead, and could see margins come under pressure.
While we believe margins will stabilize around 29% through our forecast period, the Trefis community anticipates upside to this metric as Yahoo fends off pressure from competitors. The community forecasts suggest display ad EBITDA margins will reach 41% in 2011 before stabilizing near 33% going forward. The community forecast implies a slight upside to our price estimate for YHOO stock.
Our price estimate for Yahoo’s stock currently stands at $18.53, about 10% above market price.
Increasing Monetization Opportunities for Yahoo…
Yahoo has has undertaken a few initiatives to increase its video programming content lately. It is improving the amount and quality of its video content across a variety of media verticals including sports, news, finance and entertainment. We expect the average number of monthly Yahoo users to increase from ~550 million in 2008 to 800 million by the end of our forecast period. We further anticipate higher usage levels as Yahoo’s 242 page views per month in 2008 increases to 272 page views per month by the end of our forecast period.
As online advertising continues to take share from traditional media like TV and newspapers, we believe advertisers will consolidate their marketing around big companies like Google and Yahoo, which provide unmatched scale and visibility.
… But Losing Ground to Google and Facebook
Although Yahoo’s display advertising revenues climbed 17% in Q3 2010 (to $465 million), competitor Google is showing no signs of slowing. In its Q3 earnings call, Google for the first time gave a breakdown of its key businesses including YouTube. Jonathan Rosenberg, Sr. Vice President of product management for Google, said that the company’s run rate for display ad revenues is approaching $2.5 billion. Much of Google’s display ad business comes from its $3.1 billion acquisition of DoubleClick.
Yahoo is also facing an increasing threat from Facebook, which is speculated to have earned around $2 billion in revenues in 2010.
Trefis Community Forecast
The Trefis community forecasts suggest that Yahoo’s display ad EBITDA margin could stabilize around 34% in the years ahead, off of an estimated 27% in 2010. Comparatively, our base case forecasts anticipate stabilization near 29% going forward. The community forecasts imply slight upside to our $18.53 price estimate, which is already about 10% above market price.
To see the impact of various display ad EBITDA trends on Yahoo’s stock value, drag the trend line in the modifiable chart above.
Disclosure: No positions