The most important component of the Yahoo! Inc. (YHOO) stock price is undoubtedly its large stake in Chinese e-commerce company Alibaba Group Holding Ltd (BABA), which is worth north of $20 billion in and of itself.
Considering Yahoo’s market capitalization is about $30 billion right now, YHOO stock as it sits today is basically just a giant proxy for BABA.
Given the fact that Alibaba likely hasn’t ba-ba-bottomed yet, it might be wise for YHOO to take a note from Dell‘s acquisition of EMC Corporation (EMC), and diversify its business.
I’m not recommending that Yahoo go out and spend $67 billion to acquire a cloud-based storage company. That would be irresponsible and probably impossible. No, what YHOO needs to do is far more feasible: It must pursue the $15 billion fantasy football market — aggressively.
Fantasy Football: Growing by the Minute
If you’ve watched football at all this season, you’ve undoubtedly seen an ad for one of the two leading fantasy football sites, DraftKings and FanDuel. The business model is simple: Players pay a fee to enter a weekly contest, then draft NFL players to their Fantasy teams. A small number of winners get paid out, everyone else gets nothing, and the companies keep the rest.
Easy-peasy.
This is a unique opportunity for YHOO for a couple of reasons:
- Yahoo! and ESPN were already the two most popular destinations for Fantasy Football players before the “daily fantasy” sites incited a wagering frenzy.
- Last week, DraftKings and FanDuel hauled in an estimated 7.1 million paid entries into their weekly tournaments — a record high number.
- YHOO can piggyback off of the recent popularity of DraftKings and FanDuel (and their ad spend), and dive directly into the market with a midseason ad campaign of its own that steals players away from the two leaders.
- The Fantasy Sports Trade Association estimates the total value of the fantasy football market at about $15 billion annually — a number that doesn’t include advertising revenue from the hosting websites themselves.
- YHOO can instantly diversify its business without spending $67 billion.
What This Could Mean for YHOO Stock
This year, Yahoo is expected to generate just over $5 billion in revenue. That’s great and all, but consider this: If the company could capture just 10% of the paid fantasy football market, it would haul in an additional $1.5 billion a year. That would be 30% revenue growth — far more than the 1% growth YHOO is expected to see in 2016.
And that, mind you, is not considering online advertising revenues — and assuming the market itself doesn’t grow at all next year.
To be fair, YHOO has technically already entered the market. If you’re a Yahoo fantasy football player, you’ll be prompted to enter one of their weekly competitions when you go to check out your squad.
But Yahoo’s doing that rather quietly, and there’s little-to-no advertising or promotion being done on that front as it stands currently. Its market share is almost certainly teensy. It needs to make its fantasy offerings more visible, and perhaps come up with a few clever ads of its own.
If Yahoo wisely chooses to pursue fantasy football more aggressively, not only will YHOO stock become less of a proxy for BABA, it may actually hypercharge revenue growth, and surprise Wall Street in the process.
But until you start getting bombarded with Yahoo fantasy football ads, I wouldn’t bet on it.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
