Yahoo Inks Deal To Improve Video Ads Monetization

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Yahoo!'s (YHOO) stock has appreciated by nearly 80% since the start of this year. While recent efforts to deliver user-centric customized content have resulted in an improvement in performance metrics such as unique user count, the company is yet to realize revenue growth for its business lines. In a fresh move, Yahoo has inked a deal with Starcom (OTCQX:PGPEF) that will give the latter exclusive access to Yahoo's "first-party" data on its visitors as well as content. Through this deal Yahoo hopes to provide targeted video ads that will not only improve user experience but also bring in much-needed ad dollars for its content. In this article, we will explore why customized content is important for Yahoo and how this deal can boost its revenues.

Customized Content To Aid Revenue Growth

Display ads revenue is a key driver of Yahoo's stock and currently makes up almost 40% of its total revenues. Content is the driving force behind display ad revenue which influences both users and advertisers on Yahoo. While users care about the quality of content and personalized information, which leads to better engagement, advertisers want to showcase more ads.

Yahoo undertook numerous website redesigns this year that pushed its unique user count to over 196 million in July 2013. The Starcom deal aims to improve user experience further by analyzing user search preferences and creating targeted original video content based on those preferences. The videos can be tweaked to incorporate an advertiser's message (ads) and distributed to targeted audiences across Yahoo's websites. The deal also marks the first time that Yahoo's search data will be leveraged to analyze what display or video ads should be run.

We believe that this effort will not only improve user engagement but also drive growth in unique visitor count. The number of unique visitors is vital for Yahoo's display ad revenue as higher traffic generally translates into more pages viewed across Yahoo's websites. This ultimately results in an increase in the number of ads shown. We currently forecast the number of unique users across Yahoo's properties to rise from 800 million to 890 million per year by the end of our forecast period. If this number reaches 1 billion per year as a result of improving content, our price estimate would increase by 5%.

Additionally, better content and user engagement also increase time spent on the website. Advertisers are willing to pay higher revenue per impression for sites that engage users. According to comScore, Yahoo is ranked third in terms of time spent by U.S. users on the website. As Yahoo enhances user engagement through this deal, we expect monetization to improve in the future resulting in higher revenue per page view (RPM). Currently, we estimate RPM for Yahoo at $1.20 per 1000 impressions. However, if RPM were to improve to around $1.70, there can be 5% upside to our price estimate.

We currently have a $31.17 price estimate for Yahoo!, which is 10% below its current market price.

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