Saying that the honeymoon is over for Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer would be an understatement.
Though heralded as a catalytic chief when she left Google Inc. (NASDAQ:GOOGL, NASDAQ:GOOG) to take the helm at Yahoo! in 2012, owners of YHOO stock haven’t failed to notice that subsequent Yahoo earnings numbers haven’t been getting noticeably better.
Now, with the company set to report its first-quarter earnings after the market closes on Tuesday, it’s possible Mayer could find herself outright fighting for her job come Wednesday morning; there’s already chatter of a management shakeup.
While the Yahoo earnings numbers will of course soothe or inflame the issue tomorrow afternoon, the numbers aren’t the only matter worth a closer look.
Here’s a little prep-work for anyone planning on holding YHOO into Tuesday’s close.
Yahoo Earnings Preview
If analysts are right, Yahoo! will post earnings of 18 cents per share on $1.06 billion in revenue. The projected bottom compares poorly to the year-ago profit of 38 cents per share of YHOO stock.
But bear in mind that Yahoo! has been reconfiguring itself — buying and selling different pieces of itself — for several quarters now. The revenue figure is the more telling of the two, and it’s only projected to slide 2.9% below the Q1 2014 top line of $1.09 billion.
Perhaps even more indicative of the company’s health is its so-called “core” business: ads.
Of course, it’s not as if Yahoo! has impressed on this front either. The company’s gross advertising revenue slipped 1.3% in 2014, and Yahoo! actually lost advertising market share last year.
Morgan Stanley analyst Brian Nowak sees more of the same on tap for the upcoming Yahoo earnings announcement, saying: “Looking ahead, we expect Yahoo to continue to be an online display share loser, with its display business declining at a 1% forward 4-year CAGR (compound annual growth rate) as the market grows 14%.”
What Owners of YHOO Stock Need to Know
With that being said, while the company’s Q1 numbers will explain where the company’s been, they will only scratch the surface of where Yahoo is going. A handful of bigger-picture factors are going to dictate how well the company performs in the future. To that end, and in no particular order…
1. More independence from Microsoft. Though the news was covered well enough when unveiled last week, the potential impact may have been understated.
What happened? Long-term partners Microsoft Corporation (NASDAQ:MSFT) and Yahoo! partially separated their search operations. Prior to last week, Microsoft did the work of handing web-search operations for Yahoo! and Bing while Yahoo! took care of selling ads and driving revenue for both search sites. Now Yahoo! has a little more self-serving flexibility in the venture.
The new agreement won’t impact the Yahoo earnings numbers due Tuesday afternoon, but it will impact future results.
2. Mobile. There’s no denying mobile web is the future. There’s also no denying that Yahoo is conspicuously missing from the mobile landscape as it stands right now.
In her defense, Mayer recognizes her company needs to do more on the mobile front, and has come up with a plan to do just that. It’s called MaVeNS — an acronym for initiatives to tap into mobile, video, native, and social opportunities. Unfortunately, Yahoo is going to need more than strained acronyms to become relevant on the mobile front.
3. Starboard Value. Although it may not come up during the Yahoo earnings conference call (or ever, explicitly), hedge fund Starboard Value has been pressuring the company to make significant changes, and it isn’t apt to back down until its gets satisfaction. Although Starboard decided not to wage a proxy battle a few weeks ago, Starboard clearly isn’t going to give up on its efforts to unlock value by breaking the company into smaller pieces. Like it or not, Mayer is going to be forced to deal with this pressure one way or another for the foreseeable future.
Bottom Line for YHOO
There’s no denying YHOO as a whole is still valued well below the sum of the value of all its parts. That makes it tough to not like it, regardless of how weak its core advertising business has been.
On the flipside, after two and a half years of Mayer as CEO, owners of YHOO stock are becoming understandably frustrated.
Besides booking the Alibaba Group Holding Ltd (NYSE:BABA) windfall (which Mayer merely inherited rather than created), there’s been little to no organic growth; a string of small acquisitions like Tumblr, Blink, and Pitch don’t seem to be bearing much fruit. These shareholders may move beyond their tipping point Tuesday afternoon if they’re still not given any real reason to remain patient.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
