For a name that was once synonymous with the Internet, Yahoo is now a modern day parable of just how far and how fast a technology company can fall in the Age of the Internet.
Yahoo has averaged one CEO per year for the last five years. Its list of failed experiments reads like a What's What of tone deaf ideas. From Yahoo Assistant to brilliant ideas like Babelfish, from contest site Bix to Yahoo 360°, to unsupported Peter-Pan syndrome successes like GeoCities, Yahoo is the place where old internet memes go to die.
That may all be about to change with the arrival of Marissa Mayer.
Her resume is daunting, to say the least. As Google's (NASDAQ:GOOG) first engineer without a Y chromosome, former VP Mayer has been directly responsible for more Google employees than anyone else in the company. She sits on the board of Wal-Mart (NYSE:WMT), making her hire one of the smarter moves the Big Box retailer has made since Sam Walton was still alive. At thirty-seven, she's the youngest CEO of a Fortune 500 company. (She replaced her boss, Google co-founder Larry Page.)
More importantly, she's been involved in virtually every major successful initiative Google has come up with. Google Search, Google Images, Google News, Google Maps, Gmail. She's the reason behind Google's notoriously clean homepage.
You've seen her work. You probably use it every day. That user experience that laid waste to every other search engine on the planet? That was her.
Form Is Function
Still, this is Yahoo we're talking about. What can Marissa Mayer possibly bring to the table that could bring about a rebound from a collapse so notorious that the last five years of its history reads like a disaster movie script?
Answer: Artificial Intelligence with a focus on the mobile space, a return to simplicity and a sleek re-design of everything Yahoo.
When Steve Jobs returned to Apple (NASDAQ:AAPL), people wondered what he could accomplish. The answer, of course, was that he could accomplish being Steve Jobs: a marriage of art and science, form and function, a love of invention and an utter disdain for bureaucracy. That's exactly what happened. In hindsight, the surprise was that anyone was surprised.
Identity is an incremental process. It takes years to build. You can reinvent yourself all day long. You can't re-invent what you're good at. You can only add to what you have.
I expect that Yahoo's offerings are going to get smarter, simpler, more tasteful and more mobile because elegance, fashion, location and A.I. are what made Mayer the youngest Fortune 500 CEO.
"You are going to get comments from Marissa on that gray text," a female colleague warns one of the waiting managers. "Be prepared for that."
"I think the gray is unimportant," he replies. "It looks fine."
"I know," the colleague says. "But you will get comments."
Ms. Mayer enters the room a few minutes into the manager's presentation and quickly interrupts him. "That gray-on-gray text is hard to read," she says. "What are we going to do about that?"
"We can change it," the manager concedes.
"There are a lot of different aspects of research that need to go into building that search engine. You need to understand speech. You need to understand images. You need translation, so you can find the answer regardless of what language it's written in. You need a lot of artificial intelligence to be able to analyze what information is relevant and synthesize it. You need a great user interface and user experience to put it in context. And you probably need a certain amount of personalization, so the search engine relates to the person, to their background, what they already know about, what they looked for last week.
"It's totally fine to fail, you just have to fail fast..."
The key to success - especially with ideas in the "far-flung" category - is to make small investments with a few people. That way, innovation is fostered and failure doesn't hurt as much.
In other words, "move fast and break things."
Yahoo vs. Facebook
Move fast and break things. -- Facebook motto
Facebook has 900 million monthly users and a current market cap of $ 61.49 billion, with a P/E of 92.05. Yahoo has 700 million monthly users and a market cap of $19.46 billion, with a P/E of 17.93. Facebook's user base has been described as "more than the populations of the U.S., Indonesia and Brazil combined."
Okay. Yahoo's user base is more than the populations of the U.S., Brazil, and Russia combined. We lost Indonesia and gained Russia, a 23% difference in the user base and a 513% difference in P/E.
Facebook stockholder equity (assets such as cash, working capital and property, minus the firm's liabilities)
Yahoo stockholder equity (assets such as cash, working capital and property, minus the firm's liabilities)
$5.2 billion dollars
$8 billion of available credit
$14.5 billion (liquidation value of Yahoo's stake in Alibaba [$14 billion]+ Yahoo! Japan [$6.2 billion] - 40% taxes = $12.1 billion + $2.4 billion cash-on-hand =$14.5 billion)
+ $8 billion in debt
+ $0 in debt
Yahoo is currently on track in liquidating half of its Alibaba stake by the end of 2012. (The other half, along with Yahoo Japan, may be sold off as early as next year.) That additional $7 billion, plus cash on hand, equals $9.4 billion dollars in cash. That's a major increase in Mayer/Yahoo's war chest.
The case for buying Facebook but not Yahoo is really very simple. Facebook is hot, Yahoo is not, and Facebook is "stickier" - users tend to spend more time on Facebook than they do on Yahoo. Facebook is perceived to have more intangible assets - good will - than Yahoo does.
However, there's a perverse corollary to the "Who's Hot, Who's Not" argument: Yahoo has a greater chance for a stock pop than Facebook does, because for Mayer/Yahoo, the bar is set only an inch above the ground, while Zuckerberg/Facebook will have to pole vault in order to justify their current valuation.
Note also that those intangibles don't extend to name recognition. Everyone recognizes the name Yahoo and everyone recognizes the name Facebook, and due to Facebook's constant media battles over privacy, its not a given that anyone feels better about Facebook than they feel about Yahoo.
All else being equal, why should I pay 92 x earnings for Facebook vs. 18x earnings for Yahoo when both companies are in the process of rapid restructuring, expanding their mobile footprint, paying top dollar for new talent and being run by leaders of proven ability?
One objection is that, web turnarounds are few and far between. It would take an Apple-like resurrection to pull it off, and Mayer may not be up to the task.
When you really think about it, though, the Apple analogy is blown out of proportion. Apple was in much, much worse straights than Yahoo when Steve Jobs returned as CEO in 1997. It had only 4 percent share of the PC market. Annual losses were over $1 billion annually and it was few months away from bankruptcy.
Yahoo is nowhere near bankruptcy. Its revenues have increased for two quarters in a row after eight quarters of decline. It's the 4th most visited website in the world. Marissa Mayer doesn't have to pioneer the iPod, iPhone, or iPad. Coming up with an iMac-sized achievement will be enough to put her, and Yahoo, over the top.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in YHOO over the next 72 hours.