Should I Buy Yahoo? 3 Pros, 3 Cons

by Tom Taulli | April 24, 2013 12:47 pm

Yahoo’s (NASDAQ:YHOO[1]) first-quarter report gave bulls and bears alike plenty to glom onto.

On one hand, revenues of $1.09 billion were flat year-over-year and were just shy of analysts’ expectations for $1.11 billion. However, there was improvement on the earnings side, as profits of 38 cents were 40% improved YOY and much better than expectations of 25 cents per share.

Investors seem confident about the company’s long-term prospects, if the stock’s 24% year-to-date gain is any indication. But can fresh Yahoo CEO Marissa Mayer continue to deliver, or should you be cautious heading forward? To see, let’s take a look at the pros and cons of YHOO.

Pros

The Cool Factor: Mayer has put Yahoo back into the spotlight: In the past year alone, the number of incoming resumes has tripled, and the attrition rate for top talent has been halved. These are all encouraging signs considering that Yahoo has to have great employees if it plans on building a great product. Mayer also has caught fire on the dealmaking front, as many founders seem willing to sell out to Yahoo.

Great Products: Yahoo has spent nearly a decade resting on its past glories and shown little enthusiasm for risk-taking. Mayer has made it clear this approach is over. She has placed a laser-like focus on those products that essentially can be “daily habits.” She has also revamped the Yahoo portal for the web, mobile and tablets by adding personalized news feeds and integrating social features, as well as upgraded Mail and Flickr.

Mobile: Mayer has been remaking Yahoo into a mobile-first company. This is really the key for Yahoo — about 1 billion people access the Internet via mobile devices, and the growth rates remain substantial. The company’s monthly mobile users have grown to 300 million, up from 200 million at the end of 2012. Yahoo also has a variety of products that should do well in mobile contexts, such as stock quotes, weather, entertainment news and others.

Cons

Growth: Yahoo’s growth has been anemic, and probably will remain that way for the next several years. This is especially bad given the recent history of tech turnaround efforts, such as Nokia (NYSE:NOK[2]), where investors have shown increasingly smaller bursts of patience after each failure. Mayer will need to snag every possible win to maintain enthusiasm for the stock.

Competition: Yahoo’s competitors are not slowing down. Facebook (NASDAQ:FB[3]) continues to push its mobile efforts and roll out its own advertising network, which could take away Yahoo’s business. Google (NASDAQ:GOOG[4]) is leveraging its valuable assets — like YouTube, Maps and Android — to grow its advertising revenues. Even Twitter is getting more aggressive with monetization and has been showing tremendous innovation, such as via its highly popular Vine app. As a result, Yahoo saw an 11% decline in year-over-year revenues for display ads. According to eMarketer, YHOO’s market share is expected to fall from 9% to 7.7% in 2013. In comparison, Google is expected to have 18% and Facebook should hold roughly 16%.

Search Business: This is a big part of Yahoo’s revenues. Last quarter showed a 10% drop, and one of the biggest issues has been a fall in prices, which could be the result of the shift toward mobile where lower rates are the norm. Also, Yahoo’s partnership with Microsoft‘s (NASDAQ:MSFT[5]) Bing has been a dud.

Verdict

Google was a great training ground for Mayer, educating her about how to build great products and monetize them. And she has been focusing on the right things at Yahoo, such as filling the talent pool, and revamping existing products while innovating new ones.

And yet, investors shouldn’t jump in hastily, if at all. Most of this good news and optimism has already been priced into YHOO, which is trading at a frothy 17 times forward earnings. That means if we don’t see any breakout products — and that’s entirely possible — the stock could come under pressure, and in a hurry.

Tom Taulli runs the InvestorPlace blog IPO Playbook[6]. He is also the author of High-Profit IPO Strategies[7]All About Commodities[8], and All About Short Selling[9]. Follow him on Twitter at @ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  2. NOK: http://studio-5.financialcontent.com/investplace/quote?Symbol=NOK
  3. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  4. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  5. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  6. IPO Playbook: http://investorplace.com/ipo-playbook/
  7. High-Profit IPO Strategies: http://goo.gl/TXQsz
  8. All About Commodities: http://goo.gl/FfP8R
  9. All About Short Selling: http://goo.gl/t5Jzb
  10. @ttaulli: https://twitter.com/ttaulli

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