With earnings growing for the first time in years during 2010, and for share prices with nowhere to go but up, Yahoo! (NASDAQ: YHOO) is in a uniquely tenuous position, both as a corporate entity and as a part of a healthy portfolio.
A decade ago, Yahoo! embodied the future of business on the Internet, a company that had successfully monetized how people access information on the Web. Then it built a wealth of free-to-access, advertising-supported services on top of that base. Yahoo! made astronomical sums of money, for both itself and its investors after its initial public offering in 1996. It sold 2.6 million shares at $13 per share in the IPO. By the beginning of 2000, Yahoo! shares sold for more than $100 per share. The company survived the burst of the dot-com bubble over the next two years.
While Yahoo! has persisted in the past decade, it is entering the last quarter of 2010 with a weak share price just 6% over its 52-week low and it lacks any brand identity at all. CEO Carol Bartz has spent 2010 looking to redefine the company, desperate to distinguish it from myriad competitors on multiple fronts. What is next for Yahoo!? What can investors learn from the company’s past to help them decide whether or not it is finally time to slough off the stock’s dead weight?
That Yahoo! plunged from $118 a share in January 2000 to $4 per share in September 2001 seemed to indicate that it would disappear like so many dot-coms at the beginning of last decade, but a series of major acquisitions and partnerships helped Yahoo! rebuild as a technology service business in addition to a consumer and user portal on the Web. Yahoo! barely grew between 2001 and 2003, with share prices staying below 2003 until it acquired pay-per-click Internet advertising service Overture Services. Renamed Yahoo! Search Advertising, the Internet ad-hosting industry remade Yahoo! as a major business again; Yahoo! grew 62% between July of 2003 when it acquired Overture and January 2006, as share prices jumped from $16 to $43. This growth was aided by Yahoo!’s forays into the telecom industry. Yahoo!’s early partnership with SBC (NYSE: SBC) in 2002 to launch its own co-branded dial-up Internet service to compete with America Online (NYSE: AOL) was a failure that left the stock stagnant, but subsequent partnerships, like that with BT Group (NYSE: BT) in Britain and Yahoo!’s 2005 DSL offering with Verizon (NYSE: VZ), fared significantly better.
The company has been on a downward spiral since, due to the rise of competitors and Yahoo!’s subsequent inability to distinguish itself on multiple fronts. Yahoo! share price shrank 46% between its 2006 highs and the end of 2007. While the company’s acquisition of Overture paid off as the pay-per-click advertising market boomed, other acquisitions fared less well. Yahoo! spent on Web businesses such as calendar service Upcoming.org, social and community sites like del.icio.us and Webjay all throughout 2005. This was during the period when Apple’s (NASDAQ: AAPL) astronomical sums of money, for both itself and its investors after its initial public offering in 1996. It sold 2.6 million shares at $13 per share in the IPO. By the beginning of 2000, Yahoo! shares sold for more than $100 per share. The company survived the burst of the dot-com bubble over the next two years.
During this entire period, Yahoo! and Microsoft (NASDAQ: MSFT) were discussing a potential merger, talks that culminated in a series of what were at first friendly takeover attempts but that became increasingly vicious as Yahoo! made demands Microsoft was unwilling to meet. The closest these talks came to fruition was in May 2008, when Microsoft offered Yahoo! $33 per share for control of the company, $5 billion more than its previous offer. But Yahoo! would not settle for below $37 a share. Over the next six months, Yahoo!’s board of directors was lambasted by shareholders and industry analysts alike, who watched share prices plummet from $29.66 per share at the beginning of the acquisition talks with Microsoft to $8.94 in November 2008. While many companies were laid low by the 2008 crash, Yahoo! was laid low by its own corporate hubris before anything else.
Carol Bartz became Yahoo! CEO in January 2009 and she has waged a campaign to rehabilitate the company’s business as well as its corporate relationships. Bartz has pushed the development of Yahoo! as a hub for users’ social networking activities, launching partnerships that incorporated Twitter technology in 2009 and Facebook in June of 2010. Yahoo! also recently acquired Associated Content, a user-generated news and entertainment Web site, for around $90 million, hoping to compete with AOL’s new focus on local content. Bartz’s efforts seemed to be paying off earlier this year, too. First-quarter earnings were up 62% over the same period in 2009, improving outlook for the company going forward even though it still missed analyst estimates on revenue by $40 million. Shares climbed above $19 for the first time since the end of its disastrous near-acquisition at the hands of Microsoft in September 2008, but Yahoo! has been completely unable to maintain that momentum. Mediocre second-quarter earnings that saw gross revenues stagnate at $1.6 billion and the company’s June loss of Internet advertising market dominance to Facebook (which now controls a 16% market share of the display-ad business) have conspired to bring Yahoo!’s share price down to $13.77 today, just above the 52-week low of $12.94.
Right now, Yahoo!’s future depends entirely on Bartz choosing a single identity for the company to develop and also the future of the Microsoft and Yahoo! advertising alliance. Microsoft reached a deal with Yahoo! in July 2009 that saw Yahoo!’s search technology integrated into Microsoft’s Bing search service as well as Yahoo! taking over sales duties for Microsoft’s advertising service. Initial payments from Microsoft helped spur Yahoo!’s improved first-quarter earnings this year. Microsoft may yet be the company’s future. If you have held on to your stock this long, it’s not yet time to sell. Investors thinking about buying at this price though might want to reconsider. Yahoo!’s future is a volatile unknown.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
