by Jonathan Berr | November 22, 2013 11:09 am
As we head into 2014, Yahoo (YHOO) is running out of gas. That’s because shares of YHOO stock have already surged more than 80% so far this year.
Yahoo stock investors had high hopes for CEO Marissa Mayer when she joined the company last year from Google (GOOG). And she has certainly brought glamour and pizzazz to YHOO, which had floundered for years under incompetent CEOs. Mayer’s $1.1 billion acquisition of Tumblr certainly made a splash as well.
But Mayer hasn’t solved the problem that plagued her predecessors and long weighed on YHOO stock: Anemic growth. In fact, YHOO stock investors have been more excited about the potential for the company’s passive Alibaba investment than anything that CEO Marissa Mayer has done to draw more users to family of Yahoo sites.
Here’s why next year won’t be as good to YHOO stock investors as this one was.
No Growth. For the next two quarters, revenue at YHOO is expected to be little changed, which has prompted some pundits to note ironically that “flat is the new up.” Of course, that’s nonsense. Flat is flat — and will keep Yahoo stock flat, too. Meanwhile, revenue at tech rivals is growing at a much faster pace than it is at Yahoo. Analysts expect Google (GOOG) sales to rise 40% this year, while Apple (APPL) revenue should expand by nearly 8%. And the tough reality is that the core YHOO business has been stagnant for a long time. During the latest quarter, display advertising revenue fell 7% to $470 million, marking its fourth straight year-over-year decline. To make matters worse for YHOO stock investors, these ads are increasingly being acquired via automatic or programmatic buying services, which typically unload inventory at rock-bottom prices.
Falling Rates. And that brings us to the next huge concern for Yahoo stock investors: YHOO remains dependent on banner advertisements at a time when they are losing popularity with advertisers. That’s because banner ads aren’t as targeted as other types of marketing messages such as search. Rates for these ads are going to continue to plummet. Plus, a glut of video advertising has caused prices in that market to tumble — a trend that also shows no signs of slowing. All this is bad for the core YHOO business, and thus for long-term holders of Yahoo stock.
Competition. Another problem for YHOO stock investors is that competition is tough. Mayer is pushing Yahoo to develop its mobile business at the same time when hot rivals such as Google, Facebook (FB) and Twitter (TWTR) are making precisely the same move. As a result, Mayer’s pledge for Yahoo to be a “mobile first company” will be easier said than done. Some analysts have suggested that the only way for YHOO to boost its revenue is through an acquisition of a high-flying website such as Buzzfeed, Pinterest or SnapChat. But a deal like that would certainly billions of dollars and could potentially be dilutive for Yahoo stock shareholders.
Valuation. The once slice of good news for the YHOO core business is that Yahoo sites did recently enjoy a rebound in traffic for the first time in two years. But the bad news for Yahoo stock investors? That “good news” has already been factored into the YHOO stock price. Shares of YHOO are trading at the upper end of their 52-week range, so they aren’t a bargain. Plus, based on next year’s projected earnings, Yahoo stock has a multiple of about 22 — a premium to the GOOG stock multiple of 20 and AAPL stock multiple 11. Oh yeah, and those multiples are for companies that are actually growing. And sure, it may seem promising that at least seven Yahoo stock analysts recently hiked their price targets on YHOO because of its decision to retain a larger-than-expected stake in Alibaba. But those hikes were to a YHOO stock price of $38, while the consensus is still at $37 — little upside from current prices. Wall Street clearly doesn’t expect much from Yahoo stock.
All in all, Wall Street has heard enough talk from Mayer. If she can’t translate her words into clear action in 2014, Yahoo stock investors will clamor for a change in leadership as they have done many times before.
Though Mayer has cautioned YHOO stock investors to be patient, noting that turnarounds take time, Wall Street has never had an abundance of patience and probably never will. The big-time run for YHOO this year was mostly thanks to Alibaba, while all other improvements are already baked into the Yahoo stock price.
All in all, the only way Yahoo stock would be worth buying is if someone gave Mayer a time machine that would enable her to go back to 2008 and encourage YHOO to take Microsoft’s (MSFT) $45 billion offer that it foolishly turned down.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
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