Yahoo, Inc. (YHOO) commands a $16.5 billion market cap with $2.5 billion in cash. The company’s net income is around $1.2 billion yearly on revenues of $6 billion. The growth rate for 2011 is estimated at -20%. The company makes roughly 95% of its revenues from display and search advertising, with the remaining revenues from subscriptions.
The key value remains to be in the company’s overseas investments in Alibaba and Yahoo Japan. The only problem is that I have seen these values range from $6 billion to $14 billion. Herein lies the problem: These businesses are only worth what someone else would pay for them, not what the general public thinks they're worth.
Going back to Yahoo’s main businesses, we can certainly see a pickup in online search globally, but unfortunately, Google (GOOG) remains in a dominant position with over 70% market share. Adding more competition (after its debacle trying to acquire Yahoo) is Microsoft and its (relatively) new search engine, Bing.
When will Yahoo search cease to exist? It may be coming sooner than later. The company has long been a useful homepage for Internet users, but with Facebook, Amazon, and other social media-driven sites taking hold, traffic should begin to wane.
Many of the resources on Yahoo’s homepage are auxiliary services. In particular, the homepage features separate sites like Yahoo Mail, Sports, Travel, News, Weather, and Finance. The challenging piece is that each has enormous competition with unlimited barriers to entry.
Over the last few years, we have seen major growth in travel websites like Priceline.com (PCLN), Expedia (EXPE) and Kayak.com. Traffic statistics show that the top sports sites are SI.com, Cbssports.com, and ESPN. How about entertainment? Go check out TMZ, Hollywood Reporter, or E! Online for your favorite celebrity news. I could pick apart each. The bottom line is that Yahoo lacks top sites on its homepage.
Now let’s talk about Yahoo Finance. I see this space losing its dominance with many newer sites offering more comprehensive data as well as similar message boards. Personally I have been looking into other areas of research for my stock ideas, and have found a few sites that offer better statistics as well as commentary. So where is the value in Yahoo? I think the company is facing its biggest challenge yet, and needs to think of something better than running below-average services.
The competition is fierce, and Yahoo has been a laggard with each new idea. In a previous article, I discussed how Google, Apple, Amazon, and now Facebook are reshaping the Internet. We could add many more of the newly public domains, like Linkedin (LNKD), Pandora (P), Zillow (Z), and others in the pipeline (Zynga, Groupon, and LivingSocial). The more time goes on, the less valuable Yahoo’s parts will become. The stock is trading at an extreme discount, but I believe it’s certainly warranted and that it may go even lower. Now is the time for Yahoo to sell off more pieces or break up the company entirely.
Disclosure: I am long AAPL, GOOG, AMZN.