I put my money where my mouth was back in January when I bought shares in Yahoo (YHOO). I’ve been well-rewarded — Yahoo stock is up 65% since then, even after a minor pullback last week — but the run faces a key test in Yahoo earnings after the bell tonight.
While YHOO revenues for the past two periods remained basically flat quarter-over-quarter, Yahoo earnings actually declined 15%. Which makes the Yahoo earnings report for its third quarter a big deal.
Namely, it’s time for results.
Yahoo Earnings Outlook
Here’s some good news to start out: Yahoo went ahead of Google (GOOG) for the top spot in unique visits in July, and maintained that position in August, according to comScore.
Here’s even better news: Mayer has spent lots of time and money buying up companies (19 so far) — both for content and talent. The YHOO Tumblr acquisition in May is the highest-profile deal to date, and it should be noted that Yahoo’s comScore numbers don’t factor in Tumblr’s 300 million monthly unique visitors.
So while I wouldn’t expect YHOO revenues to vault through the ceiling, they reasonably should at least match Wall Street’s estimated $1.08 billion for the quarter.
The million-dollar question is whether Yahoo’s has been able to leverage those increased visits with improvements in both display and search ad revenue. Both fell on quarter-over-quarter and year-over-year bases, according to Yahoo’s second quarter 10-Q report.
Mayer’s strategy to improve the revenue line was laid out when the company announced it was extending its Yahoo Stream Ads initiative. Anyone logging into Yahoo’s sports, movies or TV sections, among others, found a continuous stream of sponsored and targeted ads. As All Things D’s Kara Swisher points out, this “matching content and context of pages” is Mayer’s big gamble. While it’s a short time to judge, it has to show some traction.
Wall Street is calling for Yahoo earnings of 33 cents per share — a number that has remained steady for the quarter. Yahoo earnings have surprised to the upside for the past four quarters — a small reason for confidence in the ability of YHOO to manage expectations.
Of course, the Yahoo earnings wild card is the company’s stake in Alibaba. YHOO still owns 24% of the Chinese e-commerce giant, which pumped out over $600 million in profits in its first quarter and whose strength has gotten much of the credit for 2013′s fantastic run in Yahoo stock. While an impending Alibaba IPO means eventually its contributions to Yahoo earnings will dwindle, it remains a major driver of YHOO success.
So are we set up for a nice Yahoo earnings surprise?
With so many factors in the air, it’s difficult to tell, but the comScore details are extremely encouraging. Given Yahoo’s seeming ability to maintain expectations, investors should at least expect a YHOO match, if not a beat.
And I expect another bump up in Yahoo stock.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long YHOO.