Yahoo! Inc. (YHOO): Why The Stock Will Continue To Face Problems

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July 23, 2015 2:32pm ETF BASIC NEWS

alibabayahooJim Bach:  Yahoo stock fell in pre-market trading Wednesday after a mixed Yahoo earnings report.

Yahoo! Inc. (NASDAQ:YHOO) posted a 14.7% increase in revenue, from $1.084 billion in the second quarter of 2014 to $1.243 billion this quarter.

However, traffic acquisition costs surged four-fold to $200.2 million from the year-ago quarter, dampening the bottom line numbers with a loss per share of $0.02. This missed consensus estimates of $0.18 earnings per share.

Just before the opening bell, Yahoo stock had fallen 2% from yesterday’s close (Tuesday).

Yahoo CEO Marissa Mayer was quick to point out that the nearly 15% increase in sales was the company’s best growth in nearly nine years.

Though she failed to mention that nine years ago, Yahoo revenue was on an upward trajectory.

The last time Yahoo sales had grown 15% year over year, Yahoo was raking in about $1.6 billion.

She also failed to mention that this was the first time Yahoo earnings came out in the red since the financial crisis.

For all the “good” news Yahoo likes to tout, Yahoo earnings this year don’t paint a bright picture for this struggling online content giant’s – or Yahoo stock’s – future under Mayer from here on out…

Yahoo Stock Will Continue to Face Problems Post-Q2 Earnings

None of the progress Yahoo has supposedly made is that impressive.

Yahoo trumpeted its growing search presence. According to StatCounter, in the months after Yahoo forged a partnership with Mozilla FireFox in November 2014 for Yahoo! Search to be the default homepage on their browser, Yahoo’s U.S. search share climbed from 8.6% to 10.9%.

In the same time, Google Inc. (Nasdaq: GOOG, GOOGL) search share fell from 77.3% to 74.8%. But that proved to be a high watermark. Yahoo’s search share fell to 10.7% in February, likely as a result of FireFox users either leaving the browsing platform or switching the default homepage back to Google.

Mobile revenue grew considerably year to year, from $163 million in Q2 2014 to $252 million, and Mayer seems to think this is groundbreaking.

But Yahoo is growing from zero mobile presence to whatever share of mobile it can grab that Google’s more than 90% mobile search share doesn’t already own.

Yahoo didn’t stumble upon the Holy Grail by creating a mobile presence. Mayer simply identified a very obvious hole in Yahoo’s offerings and delivered out of necessity, not because there’s a compelling growth story there.

With every supposed accomplishment to come out of Yahoo, either someone else has already done it, or there is little opportunity to monetize it in a meaningful way.

For example…

Yahoo introduced a daily fantasy sports platform to capitalize on its already large presence in the online fantasy sports market. FanDuel and DraftKings already did that.

Yahoo is growing native advertising – ads that appear in streams on Yahoo properties.Facebook Inc. (Nasdaq: FB) already does so, and with a much more engaged audience at that.

Yahoo is bolstering its content offerings. But at the end of the day, Yahoo is still selling ads against content. This isn’t a particularly lucrative business unless the property is Google Search or Facebook’s user newsfeeds.

Yahoo seems to be trying to compete for ad dollars with Facebook and Google when in reality it’s a second-tier player in the market at best.

The best characterization of Yahoo would be to say it’s a “next-level” AOL Inc. (NYSE: AOL). Both offer search, e-mail, and news. Yahoo is doing better as a search and news property, but is falling far short of revolutionizing the game of selling ads like Google and Facebook have.

Yahoo’s best opportunity now is to take the more than $45 billion it has in holdings – whether through its Alibaba Group  Holding Ltd. (NYSE:BABA) stock holdings, its Yahoo! Japan holdings, or its cash – monetize it, return it to shareholders, and close up shop in what Money Morning Executive Editor Bill Patalon calls the “Harvest Strategy.”

Or, Yahoo can proceed with the spin-off of its Alibaba stake and begin making itself an attractive takeover target for Alibaba, a company that’s going to want to establish a global brand name at some point and could do so by buying Yahoo.

Yahoo is the “better” AOL, and there are some similar parallels in both companies as far as their struggles to keep afloat a once-great online brand name.

Like AOL, Yahoo needs to stop trying to be the next Google or Facebook and start finding a suitor.

AOL did so, and Verizon Communications Inc. (NYSE: VZ) is going to pay $4.4 billion for it.

The Bottom Line: Yahoo stock is falling on an earnings miss, but the daily Yahoo stock price movements fall far short of telling Yahoo’s full story. This is a struggling online brand name trying to compete in markets it has no ability to dominate. It needs to go the way of AOL: Swallow its pride, recognize that it won’t ever achieve the glory it once had, and let a suitor like Alibaba come in and purchase it.

Money MorningWritten By Jim Bach From Money Morning

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