YHOO Investors Are Tired of Waiting for Results

by Jonathan Berr | October 18, 2013 6:30 am

The honeymoon is over for Marissa Mayer.

Yahoo (YHOO[1]) Chief Executive Marissa Mayer has brought glamour and pizzazz to the Internet media company. But now investors want the former Google executive to deliver growth to its core advertising business, which has been lacking.

Though the Sunnyvale, Calif. company reported quarterly earnings[2] yesterday that beat Wall Street expectations … those expectations were pretty low to begin with. And the fourth-quarter outlook didn’t do much to raise anybody’s hopes.

Yahoo expects revenue to be $1.18 billion to $1.22 billion — excluding fees it pays to partners called Traffic Acquisition Costs. (Wall Street analysts base their forecasts on revenues excluding TAC.) The new range is below the $1.25 billion analysts had forecast, and flat against the $1.22 billion from the year-ago period. Yahoo also slashed its revenue outlook for the year and trimmed its forecast for operating income.

Even though Yahoo has seen its monthly audience climb 20% to more than 800 million, its core business continues to be lackluster. Display ad revenue slumped 7% to $452 million as the price per ad (excluding Korea) fell 7%. Search revenue excluding TAC gained 3% to $426 million.

During yesterday’s earnings conference call, Mayer argued that ad revenue will come in the wake of Yahoo’s many product improvements in mobile, search and other areas. Unfortunately, not all of these enhancements have gone over well. According to the New York Times[3], users of Yahoo Mail are in an uproar over a redesign of the service.

Advertisers don’t seem to be enthused by the new Yahoo, either.

According to data from eMarketer cited by Bloomberg News[4], Yahoo’s share of the U.S. online ad market will fall to 7.7% this year, down from 8.6% a year earlier. Google’s (GOOG[5]) share, by contrast, will bump up to 41.1% while Facebook’s (FB[6]) will rise to 7.1%, eMarketer says.

Mayer, like every executive trying to turn around a company, has repeatedly stressed that she can’t work miracles to undo the years of mismanagement that have hobbled Yahoo. And she’s right. Investors, however, want results sooner rather than later. They have bid up Yahoo’s stock by more than 100% in the past year in the hopes that Mayer could lead the company back to its former glory. So far, that hasn’t happened yet — not by a long shot.

During the most recent quarter, net income fell to $297 million, or 28 cents, per share, versus $3.16 billion, or $2.64 per share, last year when Yahoo recorded a $2.8 billion gain from selling shares of Alibaba. Revenue excluding TAC, fell 1% to $1.08 billion. Excluding one-time items, profit was 34 cents, a penny better than what Wall Street analysts had expected. The revenue figure was in-line with estimates.

Yahoo’s earnings were enhanced by $233 million in earnings from equity interests in Alibaba and Yahoo Japan — that’s an increase from $175 million a year earlier. In fact, investors seem to be most excited that Yahoo will be able to hold on to more of its Alibaba shares when the company delivers its initial public offering.

Many questions are left about Yahoo, including whether it’s benefitting from its recent $1.1 billion Tumblr acquisition. As Business Insider noted, “Tumblr remains conspicuous by its absence from Yahoo’s numbers right now.” Investors would also like to hear more information about the 19 or so other companies Mayer has acquired.

The other problem with Yahoo is that all the possible good news has been factored into its shares. The stock already trades well above its average 52-week target of $31.42, and it trades at a rich price-to-earnings multiple of 27.97. The risks are too great to justify the potential rewards, at least until Mayer proves she can restore Yahoo’s lost luster.

The time has come for Mayer to put up or shut up.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter @jdberr and at Berr’s World.[7]

Endnotes:
  1. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  2. company reported quarterly earnings: http://www.bloomberg.com/news/2013-10-15/yahoo-s-forecast-trails-estimates-as-ad-competition-increases.html
  3. New York Times: http://bits.blogs.nytimes.com/2013/10/16/furor-over-yahoo-mail-changes/?ref=business&_r=0
  4. Bloomberg News: http://www.bloomberg.com/news/2013-10-15/yahoo-s-forecast-trails-estimates-as-ad-competition-increases.html
  5. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  6. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  7. Berr’s World.: http://www.jonathanberr.com

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