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Social Media Screwups Illustrate Why Yahoo Is Doomed

Everyone should know by now what a disaster of a media company Yahoo! (NASDAQ:YHOO) is. But if not, let me get you up to speed on the machinations of the last few years via a few bullet points:

  • In 2008, Yahoo rejects Microsoft’s (NASDAQ:MSFT) $44.6 billion offer at the urging of co-founder and then-CEO Jerry Yang. (The company’s current market value is under $19 billion.)
  • Yang is pushed to a backseat in 2009 after people realize how stupid it was to scuttle the MSFT deal. Hard-charging Carol Bartz becomes Yahoo CEO in 2009.
  • In 2010, Yahoo gives up on search altogether by running back to a jilted suitor and plugging in Microsoft’s Bing algorithm. A decade ago it was No. 1 in search.
  • After revenues dropped from more than $7 billion in fiscal 2008 to less than $5 billion in fiscal 2011, Bartz is unceremoniously fired. Yang begins to openly pray for a buyout to save his company from oblivion.
  • Things are desperate this year. Yahoo lays off 2,000, or 14% of its work force. Founding father Jerry Yang is cut out entirely. The company sells off a stake in Alibaba Group — the one part of the business that actually is growing — in what one writer calls “selling the family silver to pay the mortgage.”

Are we all up to speed? Good.

Kicking around Yahoo is easy based on the headlines and fundamentals. But lost in the balance sheet is the general feeling that Yahoo is a rudderless organization with an utter lack of creativity and no real plan to get back on track.

To me, nothing illustrates that tale better than Yahoo’s forays into social media.

Flickr and Facebook Failures

Some might not know it, but Yahoo could have bought Facebook (NASDAQ:FB) for $1 billion if it only pulled the trigger. But even more damning than that bargain price in 2006 was the fact a lack of momentum in earnings was the biggest reason Yahoo pulled the plug on a Facebook buyout.

Thinking quarter-to-quarter while ignoring long-term trends is a fairly common habit on Wall Street … but that’s no excuse for a missed opportunity like that.

However, Yahoo’s social media snafu goes beyond the big player. The troubles also resulted from an inability and downright reluctance to grow Web 2.0 elements and instead cram these sites into the legacy Yahoo business.

Consider that at one time, Flickr was the leading photo-sharing site on the web. Serious artists stored their portfolios there, and crazy parents uploaded hundreds of baby pictures for friends and relatives. This was before Apple (NASDAQ:AAPL) iPhones and Instagram were ubiquitous, too, and Yahoo probably was first in line on the photo-sharing front when it acquired Flickr.

Things went OK at first when Yahoo bought Flickr in 2005. It upped the monthly storage limit for free users and allowed paid accounts to operate without a cap. Why not, after all? Yahoo had the scale and the programmers to take Flickr to the next level.

“Yahoo was a good fit initially,” Flickr co-founder Caterina Fake recently told Gizmodo. “It was a great steward of the brand. It was allowed to flourish. In the subsequent two years after the acquisition, Flickr blossomed.”

Of course, the bloom came off the rose soon. As Gizmodo writer Mat Honan puts it, the company was forced to focus on “integration, not innovation” because it wasn’t as profitable as other legacy Yahoo properties like the mail pages or Yahoo Sports.

Thus Yahoo has failed to keep on top of the social photo scene. Yes, some estimates say Flickr has 50 million “users,” and that’s no mean feat. But Instagram already is near or past that mark despite launching roughly two years ago.

Lessons for Investors — and CEOs

If you care about the culture clash and the squandering of creativity, Mat Honan does a great job encapsulating Flickr’s failures on Gizmodo here. But if you’re an investor wondering what the touchy-feely overtures of creative Silicon Valley types mean to you, here is what Yahoo’s handling of Flickr tells us about the company — and about other struggling tech and media giants of the same mind-set:

  • Like many uncreative tech companies — I’m talking about you, Hewlett-Packard (NYSE:HPQ) — Yahoo is a serial acquirer. It throws around money to buy other people’s good ideas because it has none itself. Flickr was one of 10 buys in 2005.
  • When Yahoo buys an idea with potential, it frequently warps the smaller company’s mission to meet its legacy business and maximize profits.
  • The new and fresh ideas eventually get mired in the old makeup of things.
  • Although some users might stick around, Yahoo ultimately winds up alienating new customers and turning off old loyalists until there’s nothing left.

I am not advocating creativity trump profits, especially for a publicly traded stock. Every business needs to make money. However, there is something to be said for allowing the fruit to ripen on the vine before you squeeze all the juice out of it.

Consider that among the 10 companies bought in 2005 with Flickr, Yahoo snapped up Delicious (formerly del.icio.us), a social bookmarking site, and Upcoming, a social calendar. In 2006 it bought Bix.com, a social network for artists who want to show off their singing or dancing or writing skills.

All fertile ground for social media, don’t you think? But none of these efforts ever went anywhere and instead just became meat for the corporate grinder.

And consider Yahoo’s squashed deal for Facebook because earnings started to fade and it didn’t want to upset the balance sheet.

In short, Yahoo was too concerned with living quarter to quarter and making flashy headlines via buyouts. As a result, it abdicated its long-term strategy and has been falling slowly but hopelessly behind for the last seven years.

In 2005, YHOO stock peaked over $40 a share. Now it’s trading for the mid-$15s.

Revenue is at the lowest level since 2004.

The company is “growing” by laying off employees and selling off ownership stakes.

Enough said.

Who’s to say whether Facebook would have been the savior of Yahoo? But frankly, that’s not the point. The lesson here is that squinting at the quarterly results means you lose sight of the big picture, and squeezing extra profits from fledgling startups at the cost of creativity can be bad for the business in the long term.

As Yahoo continues to flail about looking for quick fixes or short-term boosts to the bottom line, investors should keep this culture in mind — both as a sign to avoid YHOO stock specifically and as an example of the kind of business you should not be putting in your portfolio — at any price.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves owned a position in AAPL but none of the other stocks mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/05/social-media-screwups-illustrate-why-yahoo-is-doomed/.

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