Yahoo Searches for an End to Its Dog Days
Is it time to let Yahoo out of the doghouse?
The Web portal alienated much of Wall Street with the terms of its search deal with Microsoft. But, with the shares now off 16% since the deal was announced, investors may want to step back and look at the bigger picture.
Despite all the turmoil at the company, the number of unique monthly visitors to Yahoo sites continues to grow. It rose 10% in the year to June to 154 million, according to comScore, 79.5% of the total U.S. Internet audience and only a little below Google in terms of reach. Microsoft, No. 3 in reach, is well below, at 66%. Most of Yahoo's departments, including email, news, Yahoo Answers, sports, finance and entertainment also are growing in double-digit percentage terms. Internationally, Yahoo's traffic is up although not as much as the overall Internet audience.
Maximizing the revenue potential of that huge audience is a challenge that has bedeviled Yahoo as much as other big-audience Web sites like social networks. It would be foolish to bet that the challenge can't be overcome.After all, people spend 34% of their media time online, compared with 35% watching TV, according to a recent study by Forrester Research. But TV's percentage of ad spending is 31%, while the Internet draws only 12%—of which paid-search advertising is close to half.
Yahoo's potential is in boosting the share accruing to display advertising. Part of that means getting more big "brand" advertisers to spend money online. Brand.net, an ad firm, estimates that only 5% of brand-focused advertising dollars has moved online, compared to 30% of direct-response ad dollars. Changing that requires better performance measures for display ads and better targeting for specific demographic groups. Standardized formats for video ads would be helpful, too.
The biggest challenge may be the oversupply of inventory that has helped depress prices for display. But Yahoo's hefty audience should prove a draw for big marketers.
So how much of this potential is built into Yahoo's current share price of $14.46? Not a lot. Consider: Yahoo has roughly $2.75 a share in cash and marketable securities. UBS estimates Yahoo's stakes in Yahoo Japan and Alibaba Group are valued at another $5.81 a share, discounted 20% for tax and illiquidity. This figure is probably conservative, given the growth of Alibaba's Taobao Chinese e-commerce site. UBS values Yahoo's search business at $6.05 a share, assuming 10 times 2010 projected search earnings before interest, taxes, depreciation and amortization of $855 million. And that's before the impact of the Microsoft deal.
There may be no way around the reality that a more traditional media business built on audience and display advertising isn't going to be as high-margin as search. But Google has so far got search locked up.
Yahoo already has been punished for squandering the chance to squeeze a big premium from Microsoft. But that is done. Investors might now focus more on the potential. The deal with Microsoft could make a stronger competitor to Google, giving Yahoo upside on its share of search revenues. It will let Yahoo avoid trying to keep up in the technology-spending battle with deeper-pocketed rivals. And, although Yahoo is taking the risky step of losing control of its destiny when it comes to search, management will at least be able to focus exclusively on trying to crack the lucrative code for display advertising.
