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Vinay Singh
Vinay Singh
Articles (229) 

Yahoo!: This Move Makes It a Good Investment

May 22, 2014 | About:

Since 2012, Yahoo! (YHOO)'s share price has appreciated strongly, primarily due to the appointment of new CEO Marissa Mayer. The new user-centric approach used by the CEO is about developing customized products and services for its users. During the last few years, Yahoo! has consistently lost market share to competitors such as Google and AOL in several segments.

Going forward, it is essential for Yahoo! to reverse the decline in ad revenues and offer better quality content on its websites to generate higher traffic.

With growing popularity of smart phones and tablets, mobile platforms have become key revenue drivers for Internet companies. Higher quality content carried across various Internet-enabled devices can help Yahoo reclaim some of its lost market share and report consistent growth once again.

Quality content

Yahoo generates the highest percentage, 42.5%, of its revenues through display ads. This is followed by search advertising at 34% and subscription business at 15%.

Quality content underpins the volume of revenue generated through display ads. Better quality content will lead to higher user engagement, resulting in higher traffic directed to Yahoo’s website. To initiate more user engagement, Yahoo! now offers customized content to users, based on their online footprints and sharing trends on social networking sites.

Such efforts are behind robust growth in Yahoo's monthly unique visitors. Monthly unique visitors for Yahoo grew from 154 million during June 2012 to 167 million in January 2013. This is crucial for Yahoo!’s display ad revenues, as a higher number of unique visitors will lead to more page views.

Increased user engagement through better content will increase the average time spent on each page, which would let Yahoo charge a higher price for display advertising. At present, Yahoo is ranked third in terms of monthly unique visitors; however, with regards to average time spent on its website, Yahoo moves to the second spot.

Key Competition

Yahoo primarily competes with Google and AOL in display advertising. Google generates the highest percentage of its revenues, 61%, though PC search ads. This is followed by mobile search ads at around 13%, and YouTube at 5%. Google is a global leader in the PC search market, with a commanding market share of 67% in 2012.

Within the mobile search market, Google has 97% market share. Google operates its PC search ads division on an EBITDA margin at around 52%; in contrast, the overall EBITDA margin stands at 45%. The primary expense associated with PC search business is the traffic acquisition cost.

AOL generates 32% of its revenues through dial-up Internet subscriptions, followed by display ads on AOL sites at 26%, and display ads on third party websites at around 22%. Monthly unique visitors for AOL sites have droped during the past four years to 113 million from 123 million due to closing operations in several European countries and the sale of a few business units.

To counter the decline in its user base, AOL made several acquisitions during 2010. It acquired TechCrunch, Thing Labs, Huffington Post and StudioNow. Unfortunately, AOL’s market share in Internet search has been on a consistent decline over the past five years.

Presently, AOL's market share in internet search is below 1%, and therefore it has recently signed a revenue sharing deal with Google to bolster its presence in the Internet search market.

Initiatives to Bolster the Mobile Platform

Yahoo has strategically discontinued several mobile apps in an attempt to offer only user-centric products. At present, it offers approximately 75 apps; however, it intends to cut this down to a more controllable 15.

Recently, Yahoo reported that during the last quarter its mobile users exceeded the 200 million mark for the very first time. This underpins the importance to providing customized content by consolidating the mobile platform to a more controllable size and offering only user-centric products.

The number of unique users for Yahoo is estimated to grow with increasing Internet penetration in the emerging markets. It has existing partnerships with leading smartphone makers that amalgamate its content on mobile devices. Furthermore, it is also developing apps for the Android cluster in order to develop new partnerships.

Going forward, if Yahoo incrementally develops on the current initiatives taken for smartphones and tablets coupled with more user-centric products, then it should consistently report growth in earnings and provide investors with higher pay-outs.

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