Yahoo (NASDAQ:YHOO) is scheduled to announce its Q2 2011 earnings July 19, 2011. We would focus our attention this quarter to developments in Yahoo’s search advertising business as well as the Yahoo-Alibaba dispute and the potential effect it can have on Yahoo’s stock. Yahoo has faced recent struggles in the online advertising market at the hands of increased pressure from players like Facebook, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and AOL (NYSE:AOL).
We currently maintain a $17.30 price estimate for Yahoo stock, which is about 15% above the current market price.
Yahoo’s Search Share Still Lagging, But Some Signs of Recovery in U.S.
While Google dominates U.S. search engine market with over 60%, Yahoo’s woes seem to have reduced this quarter as Yahoo’s total core search share rose from 17.9% in April 2011 to 19.6% in May 2011.  The company’s revenue sharing arrangement with Microsoft where Microsoft will provide the search technology to power Yahoo’s search engine likely helped these gains.  While we don’t expect this to cause significant upside to Q2 2011 search revenues, it is certainly a positive step toward reviving Yahoo’s search advertising business as the company expects higher search market share as well as higher revenue per search (RPS).
Alibaba is Crucial to Yahoo’s Stock
Yahoo’s strategic investments constitute almost 35% of our stock price estimate. These investments include a 35% stake in Yahoo Japan and a 43% stake in the Alibaba Group – a privately owned family of Internet businesses that includes e-commerce services for small businesses, a consumer-to-consumer online shopping, a business-to-consumer online shopping mall and other services.
Yahoo, Alibaba Group and Japan’s Softbank Group are currently engaged in a settlement dispute over the transfer of Alipay (Alibaba’s e-payment unit) to a company wholly owned by Alibaba Group’s CEO.  The decision for the transfer has reportedly been made in order to comply with Chinese regulations, which restricts foreign ownerships in e-payment companies. Considering the contribution of these investments to Yahoo’s valuation, an unfavorable settlement decision over Alipay could have a significant downside to Yahoo’s stock.
- comScore’s May 2011 search engine rankings
- Seeking Alpha:Yahoo Q4 2010 earnings call transcript
- Bloomberg: Yahoo, Alibaba, Softbank say making progress on Alipay
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