Can Yahoo! Inc. (YHOO) Comeback?

Search engines in the U.S and China

Google Inc (NASDAQ:GOOG) continues to seek growth in emerging markets such as China; Yahoo! Inc. (NASDAQ:YHOO), on the other hand, cut its exposure to the Asian market as in September 2012 it sold a large portion of its stake in Chinese e-commerce Alibaba Group for $7.6 billion. This decision has lead to a sharp rise in the company’s cash flow. According to the company, it received $6.3 billion in cash and $800 million in preferred Alibaba shares. Yahoo! Inc. (NASDAQ:YHOO) still has a stake in Alibaba that is estimated to be worth around $9 billion.

Yahoo! Inc. (NASDAQ:YHOO) stated it will use a large portion of the funds (approximately $3.6 billion) it received for selling Alibaba to augment its share-repurchase program. In the first quarter of 2013, the company bought $775 million worth of its own stock. The sharp rise in Yahoo!’s repurchase program could indicate the company isn’t putting its resources toward investing in the business, but instead toward returning funds to its investors.

I still think Yahoo! Inc. (NASDAQ:YHOO)’s decision to sell part of its stake in Alibaba was the right one: Yahoo! should try to augment its market share in the search engine market in the U.S and cut its exposure to emerging markets – these markets are rising fast but ad revenue is much smaller. Microsoft Corporation (NASDAQ:MSFT)’s Bing is trying to reinvent its brand by running commercials that go head-to-head with Google’s service. This might not be a bad idea for Yahoo! to also try.

Google Inc (NASDAQ:GOOG) is seeing a sharp rise in revenue in emerging markets, but this rise is also dragging down the company’s average cost-per-click, which declined in the first quarter of 2013 by 4%. Moreover, if Google will keep augmenting its operations in China and other emerging markets, this could push Google’s profit margins lower.

Research and development

One indicator for potential future growth in a company is its allotment toward research and development, or R&D. Yahoo!’s R&D budget fell by 4% (y-o-y). In comparison, during the same time frame, Microsoft Corporation (NASDAQ:MSFT)’s R&D provision grew by 5% and Google’s by more than 27%. I think that if Yahoo! Inc. (NASDAQ:YHOO) wishes to compete with other leading search engines it will have to start raising its R&D budget.

I think that Yahoo! has the potential to augment its market share in the search engine market in the U.S, a business that generates among the highest revenue from ads. If the company will shift its attention toward the above-mentioned issues, it might stand a chance to recover in the near future.

The article Is Yahoo! Capable of a Recovery? originally appeared on Fool.com.

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