With Marissa Mayer At The Helm, Is Yahoo Stock Now A Smart Buy?

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After less than a year in office, Yahoo (NASDAQ: YHOO) CEO Marissa Mayer has succeeded in re-energizing the once moribund search portal and made it relevant to users again. And investors have responded by sending share prices soaring to levels not seen in years. However, Mayer still faces many challenges and it is still not entirely clear if she can do for Yahoo what she did for Google (NASDAQ:GOOG).

Yahoo's Bold Moves

In its Q2 2012 earnings report, which was released a day after the announcement of Mayer's appointment, the company reported mediocre results; with revenue excluding traffic acquisition costs showing flat growth at $1.081 billion from $1.07 billion in the previous quarter, while income from operations fell 71% to $55 million from $191 million in the same period last year. By the fourth quarter of 2012, the second quarter with Mayer at the helm, revenues ex-TAC had improved to $1.22 billion and income from operations had risen to $190 million. In its most recent earnings report covering the first quarter of 2013, Yahoo reported revenues ex-TAC of $1.07 billion and income from operations of $186 million. Although it was too early to declare that Yahoo was in turnaround, the results still beat analysts' expectations and seem to indicate the company's strategy is heading in the right direction.

The most recent move in that strategy was Yahoo's controversial purchase of the micro-blogging site Tumblr for $1.1 billion. The acquisition lets Yahoo make inroads into social media, giving the company's media network access to the microblogging site's 108 million bloggers and estimated 50 billion daily blog posts. However, the site's users, most of whom are below 25, were less than welcoming to the buyout, expressing concerns that Yahoo would interfere with the site's freewheeling culture. To ease these concerns, Mayer said that she would continue allowing Tumblr CEO and founder David Karp to run the site independently.

Meanwhile, Yahoo is also starting to build a library of original content in the hopes to getting users to spend more time at the site. Aside from producing original web series such as Tiny Commando, We Need Help and Losing Your Virginity with John Stamos, the site has signed deals with World Wide Wrestling, CNBC and ABC News for exclusive content. Analysts saw the move as a promising one for Yahoo although the new direction would put it in competition with video streaming service Netflix (NASDAQ: NFLX) and online retailer Amazon (NASDAQ: AMZN), which is also investing millions to produce its own content.

In addition, Yahoo also acquired news summary app Summly as part of its efforts to refocus the site on the mobile surfing experience. Its earlier purchase of the photo-sharing app Flickr, which has since become one of the top apps in this niche after it was redesigned, helped increase the number of active Yahoo mobile users to over 300 million. This figure covers not just Flickr users, but those who availed of all other Yahoo services over their mobile devices, including Yahoo mail and its variety of content and news sites.

Not yet a Turnaround?

Despite the rash of positive developments, however, it is still too early to say that Yahoo is in a turnaround, although it is clear that Mayer is more than earning the estimated $59 million compensation package that she is set to earn in the coming years. For example, the search revenues and display revenues of $425 million and $455 million, respectively, which were reported for Q1 2013, were still below Q1 2012 levels. In addition, despite extending its search partnership with Microsoft for another twelve months, the company is still to announce exact plans for improving its search engine's performance.

There are also questions about how Yahoo intends to monetize Tumblr without alienating its young user base. Although the site already hosts ads, these do not represent a big revenue generator for it as its revenues only hit $13 million in 2012. There is also the question of how to retain users, since the younger demographic tend to be very fickle and may stop using the site if they feel Yahoo is pushing too hard to commercialize it.

The Bottom Line

Investors seem to have welcomed Mayer's entry into Yahoo, if stock prices are any indication. Yahoo stock is currently trading at $26.30, a 72% increase over the $15.24 level it was trading at the same time last year. Undoubtedly, there are many challenges she still has to weather, and she may still be working on strategies to strengthen the many areas of Yahoo that need correction. But in her 300+ days in office she has reinvigorated the company as no recent CEO has managed to do, as seen by the fact that not only are applications up but Yahoo is successfully keeping its top talent. If investors are willing to be patient about Yahoo's growth, however, then the stock could prove to be a valuable addition to their portfolio as share prices has a strong growth potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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