Dow Jones soars above 23,000. Is it too stretched? >>> READ MORE

YHOO: Can Marissa Mayer Recover From Her Biggest Blunder?

Signature hire Henrique de Castro is out, and out with an awfully golden parachute — something that could test investors' patience


When Yahoo (YHOO) CEO Marissa Mayer announced the hiring of her former Google (GOOG) colleague Henrique de Castro as chief operating officer in 2012, she was quoted in a press release as saying “I’m personally excited to have him join Yahoo!’s strong leadership team.” She went to to describe de Castro — who reportedly was awarded a pay package of $61.6 million — as a “perfect fit.”

yahoo-yhoo-stock-marissa-mayerWell, as numerous media reports have noted, Mayer couldn’t have been more wrong.

The corporate marriage between Henrique de Castro and Mayer wasn’t a match made in heaven as the two reportedly clashed over the company’s inability to jump-start its moribund advertising sales. De Castro, who had been tasked with wooing Madison Avenue, is receiving a severance package worth as much as $109 million. No replacement was named and no official reason was given for his departure.

YHOO stock — which has run up on Wall Street’s excitement over the growing value of Yahoo’s stake in Alibaba — fell in early trading. And for good reason: If you’re a Yahoo stock holder, this is a particularly worrisome development.

YHOO Stock: Powered by Alibaba, Not Much Else

The Alibaba “sugar high” that has propelled YHOO stock is going to ebb eventually, and investors are going demand that Mayer produce some tangible improvement in the company’s financial performance. She hasn’t done that yet (though the company has been making waves on the traffic front).

During the third quarter, Yahoo reported display advertising sales excluding payments to YHOO partners fell 7% to $421 million. Even worse, Yahoo sold more ads overall but earned less from them because rates fell thanks to increased competition from Facebook (FB) and Google.

Indeed, as more ads are bought from electronic exchanges that automatically match buyers and sellers, Yahoo’s rates are probably going to continue to tumble. By 2017, so-called programmatic advertising revenue is expected to hit $16.9 billion in 2017 in the U.S. vs. $7.5 billion this year. Meanwhile, Yahoo’s share of the display advertising market was 7.2% last year, down from 8.6% in 2012. Facebook, meanwhile now sits at 17.9%.

Heading into the company’s Jan. 27 earnings report, there is little reason for YHOO stock holders to feel optimistic. In October, Yahoo lowered its guidance for fiscal 2013 for both profit and revenue. Three months earlier, it did the same thing.

Expectations, not surprisingly, are low. Profit is expected to be 39 cents, which is a decent bump above last year’s 32 cents, but analysts are expecting revenues of $1.2 billion, which would be slightly lower than the year-ago period. (By the way, I’ve lost count of how many times I have seen the words “flat is the new up” used to describe Yahoo. That might be how Mayer and YHOO stock bulls would like to spin the company’s situation, but it’s starting to wear thin.)

Marissa Mayer was hired to turn around Yahoo, and she has been paid handsomely — her 2012 total compensation was $36.6 million to make that happen, and she hasn’t done it yet.

Granted, she’s not just sitting around wishing.

Mayer has made a plethora of acquisitions, including last year’s $1.1 billion deal for the popular blogging site Tumblr. And during the recent Consumer Electronics Show, YHOO made a slew of announcements, some of which I liked and some of which I didn’t.

Meanwhile, Eric Jackson — head of the Toronto-based hedge fund Iron Fire Capital — argued this afternoon on CNBC that Yahoo and AOL (AOL) are on a a “collision course” and are bound to merge.

“I think it’s going to to be sooner rather than later,” he said, noting that he is long AOL.

I don’t buy this argument for a couple of reasons. First, merging two struggling companies creates a larger weak company, not a stronger one. Plus, rumors of Yahoo-AOL tie-up have been around for years — if a deal hasn’t happened by now, it’s probably not going to happen.

Bottom Line

The path ahead for Mayer won’t be easy. With Henrique de Castro gone, Mayer has no one but herself to blame for Yahoo’s underperformance. The fact that she botched such a key hire isn’t going to sit well with the investors Mayer keeps asking to be patient.

All the hoopla around Alibaba and Yahoo Japan obscures the fact that one of the most powerful women in technology has little to show for her efforts. For now, Mayer is lucky that her stock is being boosted for reasons that have nothing to do with her.

Following this latest development, though, YHOO stock could easily crater if the company doesn’t show marked improvement sooner rather than later. Yahoo is a stock that investors should take a pass on right now until there is a major pullback or evidence emerges that Mayer’s strategy is working.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC