Is Online Advertising In Permanent Decline?

Includes: AABA, GOOG
by: Zecco

By Paul Quintaro

On Tuesday, before the bell, online giant Yahoo (NASDAQ: YHOO) reported earnings and revenues. The company just barely beat estimates for its earnings, but revenues fell below expectations, coming in at $1.17 billion versus an estimated $1.19 billion.

Yahoo’s CFO Tim Morse cited a decline in revenue generated from display ads. While the numbers indicate that Yahoo may be losing out on this market share to competitor Google (NASDAQ: GOOG), Google’s own earnings could indicate that Yahoo’s failings are part of a larger trend.

Google’s stock sold off last week after the company missed Wall Street’s expectations for earnings. Google’s cost-per-click declined 8% in the last quarter. This is the amount of money advertisers are willing to pay for clicks on ads on Google.

Economic decline across the globe, particularly in the eurozone, may be having its affect on the Internet giants—showing that not even tech companies like Google and Yahoo are wholly recession proof.

While Google may be able to recover from the decline in its reliance on online advertising, Yahoo may not be as lucky. Since Google built its business on Internet search, the company has expanded into other markets, with its mobile phone OS Android perhaps being the most significant venture. Yet, Yahoo seems to have little else to fall back on outside of its online web portal. Some investors have been speculating about the possibility of generating new cash inflows through the sale of the company’s Asian assets, particularly its stake in Alibaba group.

Still, while selling those assets could bring in a tremendous amount of cash to Yahoo in the short term, ultimately, the Asian assets may prove to be the best assets of the company, and could leave the company an empty shell.

Arguably, a similar situation may have befallen Sears (NYSE: SHLD). Some commentators have speculated that Eddie Lampert went after Sears simply for the purpose of getting access to, and then slowly selling off, the company’s valuable real estate holdings.

So, what are the longer-term prospects for Yahoo?

If the recent turn of events is a sign of a larger trend—that companies can no longer solely rely on online advertising revenue—then the company is at risk. Yahoo brought in former PayPal head Scott Thompson to replace outgoing CEO Carol Bartz. While Thompson’s track record may give investors something to be hopeful for, the new executive may have his hands full.

Disclosure: At the time of distribution of the material contained herein, neither Zecco Trading nor Zecco Forex was a market maker or acted as the contra-party for customer transactions through the firm’s principal accounts for the securities discussed. Zecco Holdings, Zecco Trading, Zecco Forex, and their officers/partners/employees may hold a nominal financial interest in any of the securities discussed herein, with the nature of the interest consisting of, but not limited to, any option, right, warrant, future, long, or short position. Neither Zecco Trading nor Zecco Forex has participated as a manager or co-manager in public offerings of the securities mentioned herein within the last twelve months.

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