Yahoo (YHOO) will outperform Google (GOOG) (GOOGL) this year based on the value of its Alibaba (BABA) holdings and the potential upside in its MVNS segments. It's kind of ironic when taking into consideration Google has the higher quality business, a well-established moat in search, and promising business ideas/products in development at Google X. Google has more cash than Yahoo and has a better Search product. So why invest into Yahoo when all indicators point to Google as one of the better stewards of capital for the 21st century?
Yahoo is working on the few areas it knows how to compete in, and the initial comments on the modification of its search deal with Microsoft (MSFT) may offer a glimmer of hope for investors following the tax-efficient spin-off of Alibaba.
Here's what Marissa Mayer stated on the quarterly earnings conference call:
We were excited last week to announce a renewed and amended partnership with Microsoft. This renewed partnership allows us greater flexibility and enhances competitiveness by allowing us to iterate and experiment more with our user experience and monetization. The amended agreement has a five-year remaining term and is distinctly similar to the prior arrangement, except that it reduces our exclusivity commitments on PC to 51%, addresses the traffic acquisition cost we pay Microsoft on a gross basis rather than a net basis, and lets Yahoo Call on Microsoft for search only, ads only, or both together, paying a fixed cost rather than a revenue share for items that we discard without display.
The second sentence where Mayer mentions "flexibility, iterate and experiment with user experience and monetization" is perhaps the most important. For starters, Yahoo hasn't gained any search share in fact, it lost share following the search deal it inked with Microsoft back in 2009. Sometimes, dealmakers put together poor performing deals, and this was one of those deals.
Source: comScore
What Yahoo lost in the prior deal was the ability to differentiate its service from Google and Microsoft. The lack of differentiation made it difficult for users to rationalize the use of Yahoo Search over competing alternatives. After all, if the search experience was going to be the same on both Yahoo and Bing, why use Yahoo?
Also, Yahoo Search is difficult to access. Unlike Google and Bing, you have to type "Search.Yahoo.com." Yahoo.com goes to the homepage instead of the search engine, which baffles me. If Yahoo.com went directly to the search page, more users would use Yahoo Search. On Search.Yahoo.com all of Yahoo's adjacent properties like Yahoo Mail and Yahoo Finance have links at the top. So it's a much better layout than the homepage.
But here's the problem. Yahoo doesn't have useful Search technology yet. It outsourced that problem to Microsoft. Yahoo went from having to allocate 100% of its traffic to Microsoft's search engine to 51% of search traffic (for PCs). This means that Yahoo can directly monetize half of its own search queries with its own search technology.
Since Yahoo has the potential to monetize its own internally developed search technology, further resources will be committed to developing a new search algorithm. This search algorithm will need to work across a universe of applications, web pages and non-standard file formats. Furthermore, the mobile search feature will need to become a digital assistant similar to Siri, but with the ability to interact with an ecosystem of applications. Combining contextual search with a mobile digital assistant could give Yahoo the technological edge it needs.
However, competition will be fierce. Microsoft is working on revamping its entire software ecosystem, and needless to say Google has an inherent advantage because it operates Android. For those reasons, Yahoo will need to quickly innovate and invest aggressively into marketing to develop a must-have search app.
Overall, the next five years may be different from the prior 15 years of Yahoo's history. It's still an underdog in the search space, but recent events indicate that Yahoo still has a shot at reclaiming some of its lost momentum across display and search advertising. For those reasons, investors should consider buying the stock following the spin-off of its Alibaba stake.
