by Tom Taulli | June 7, 2013 7:00 am
It’s been a long time since Yahoo (YHOO) was cool. Yet here we are, talking about the company in excited tones once again.
CEO Marissa Mayer has proven able to gin up buzz and excitement around her company, and that hype has made its way into YHOO stock, too. Since she came on board in mid-July 2012, shares have gone on to post a gain of 66%.
Powering that push (and any future growth) are a number of gears turning in concert. But which of these gears are the most important?
A big part of Yahoo’s move has been its holding in Alibaba, which some think could pull off a massive IPO this year. The equity position in Yahoo! Japan probably also has provided a boost.
But Mayer — a product expert — has been laser-focused on the core business at Yahoo. As an executive at Google (GOOG), she helped to build Google News, Google Maps and Gmail, and it was her idea to make the Google homepage just about search — not a busy portal. Now, Mayer has brought some of this magic to Yahoo, revamping a variety of the core products.
One example is Flickr, which had eroded over the years. But now the property has undergone some big changes, such as with a sleeker design and the capacity for higher-resolution photos, not to mention a whopping terabyte of free storage for users.
At the same time, Mayer has been aggressive in pruning lackluster products. She has dropped offerings like SMS alerts, Upcoming and Yahoo Deals.
No, I previously hadn’t heard of these, either.
While all these moves have worked well for the company, it looks like the real key to Mayer’s strategy is M&A.
Part of Yahoo’s M&A strategy is snagging top-notch engineering talent, especially in the mobile space. To this end, she has acquired spate of early-stage operators like Stamped, Summly, Jybe and Astrid.
But perhaps the most important deals are those that can bring new products and audiences. An interesting case of this is the recent acquisition of PlayerScale (which, by the way, has received little media attention). The company operates a platform to help game developers with core functions like payment processing, analytics, sign-ins and leaderboards. So far, there are 150 million users, and about 400,000 sign up every day.
Of course, the deal that has garnered the most attention is the $1.1 billion purchase of Tumblr.
On its face, it makes a lot of sense. Yahoo wants to capture the young demographic, which is Tumblr’s sweet spot.
The site also has tremendous scale, with more than 300 million monthly unique visitors who create 900 posts per second and spend a whopping 24 billion minutes per month on the site. The company has seen big mobile activity as well: More than half the user base uses the mobile app, averaging seven sessions per day.
While all this is impressive, there is a nagging issue: monetization. Last year, Tumblr generated a meager $13 million in revenues.
Tumblr should benefit from the global sales team of Yahoo, but excessively aggressive focus on monetization might hollow out the user base.
What’s more, the ad rates for Tumblr will probably be uninspiring. Unlike Facebook (FB), the site does not have huge amounts of details about its users. And then there’s the issue of racy content — do companies want to risk their brands by having their ads placed next to photos that verge on being pornographic?
It appears Mayer might not be finished with the mega-deals. According to a recent investor conference, it appears that Yahoo is thinking of buying a location-based mobile company, such as Foursquare. But does Yahoo have the bandwidth to enter yet another market?
More importantly, does it need to?
So far, Yahoo’s vision is unclear — at least to us outsiders. But YHOO will have to have focus if it ever hopes to successfully turn the ship around. There’s no better example of this than when Steve Jobs returned to Apple (AAPL) — his main order of business was to focus all of the company’s efforts.
But it took him time to get Apple back on track, and he didn’t do it via Hail Mary acquisitions. He just focused on making a couple products insanely great.
From an investor standpoint, Yahoo’s stock is already reflecting expectations of a turnaround. YHOO currently trades at 18 times earnings, a premium to even Google, which trades at 16x. And that company has dominant positions in the markets that Yahoo aspires to win, such as mobile, video and search.
Yahoo probably has a long road ahead. But while the company’s M&A moves certainly inspire a little confidence, investors still should wait until there’s more tangible signs that Mayer’s strategy is getting actual traction.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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