There’s been much excitement in the tech world lately — just look at the standout companies like Facebook, Twitter, Zynga and Groupon. In fact, there’s a good chance that they will all be public companies within the year.
But old-line Internet companies can’t seem to get any momentum. One prime example is Yahoo (Nasdaq:YHOO).
Back in 2008, the company received a buyout offer from Microsoft (Nasdaq:MSFT) for $33 a share. But Yahoo’s management thought it was too low.
Now the stock price is at $17.14. Yes, it’s been brutual.
Can Yahoo get its mojo back? Here’s a look at the pros and cons:
Pros
Franchise properties. Yahoo has top websites in major categories. Besides its highly popular home page, the company also has great destinations for news, sports, finance, games and entertainment. With this breadth, Yahoo is one of the few companies that can offer large advertisers targeted, large audiences in key demographics — both on the web and mobile.
Restructuring. Yahoo’s CEO, Carol Bartz, knows how to cut corporate fat. And over the years, the company has become a bloated operation. While there has been disruption, Bartz has taken the tough steps to find savings, especially in headcount.
Bartz has also unloaded various assets, such as selling HotJobs.com and Zimbra.
Unlocking value. Yahoo has a 35% stake in its Japan unit and a 40% position in Alibaba, which is a major e-commerce player in China. While it’s far from clear cut, the total value of these assets is estimated at $14 to $15 a share. In other words, it probably makes sense for Yahoo to find ways to monetize them.
Cons
Lack of innovation. What are some of the cool products that have come from Yahoo lately? Can’t name any? Unfortunately, Yahoo! has lost its magical touch. If this continues, it will be tough for the company to get traction again.
The Facebook factor. Back in 2006, Yahoo tried to buy Facebook for $1 billion. Perhaps the offer should have been higher. Of course, Facebook has now become the premier Internet property and is putting lots of pressure on Yahoo
While Yahoo is expected to maintain its 16% share of the display-ad market, Facebook is predicted to reach a whopping 21% (according to eMarketer) in 2011. This is up from 13% last year.
Paid search. To try to improve this business, Yahoo essentially outsourced its operations to Microsoft. But the process hasn’t been smooth. Even though Microsoft is showing some strength with its Bing search engine, the fact is that Google (Nasdaq:GOOG) easily remains the leader, with a market share of roughly 65%.
Verdict
Yahoo faces many challenges. However, the company has solid assets and, over time, Bartz should find ways to unlock the values. Keep in mind that her compensation is heavily based on the upside of the shares.
In fact, after its latest quarterly report, shares of Yahoo have climbed 6%. Already, there are signs of improvement at the company. But it’s still in the early stages.
Yet for investors with patience, the pros outweigh the cons on this stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
