Facebook Inc (FB), Google Inc (GOOG): Yahoo! Inc. (YHOO)’s 3 Biggest Problems Keep Holding it Back

When I bought my first computer and got connected to the internet, Yahoo! Inc. (NASDAQ:YHOO) and AOL, Inc. (NYSE:AOL) were all the rage. At that time, people were just beginning to realize the potential of the internet, and Yahoo! Inc. (NASDAQ:YHOO) was the internet search engine of choice. As the years went by, Google Inc (NASDAQ:GOOG) came along, and is now the most popular search engine by far.

Now, when people need bits of information, they use the catch phrase “Google it”. Yahoo! is currently the third largest search engine site behind Google Inc (NASDAQ:GOOG) and Bing, which is owned by Microsoft Corporation (NASDAQ:MSFT). Even die hard Yahoo! has fallen, but it is still a relevant search engine site, and with the right catalysts, it could make up some of the ground that it has lost to Google.

Yahoo!’s fourth-quarter earnings confirmed that it is making progress. In the fourth quarter, Yahoo! Inc. (NASDAQ:YHOO) had revenue of $1.34 billion, compared to revenue of $1.32 billion in the fourth quarter of 2011. Net income was $272 million, compared to net income of $295 million a year ago, and its earnings per share came in at $0.23 compared to earnings per share of $0.24 a year ago.

The best news from the earnings report was that Yahoo!’s quarterly and annual revenues were both fractionally higher on a year over year basis. The revenue increase was Yahoo!’s first in four years. Another bit of good news was that its total search ad revenue improved 3.8%, and its per-ad revenue strengthened 7%.

In addition, its gross margin of 69% and its operating margin of 16.1% were both industry highs. The final bit of good news was that the company finished the quarter with $4.2 billion in cash. The bad news was that earnings from its core business display-ads fell 3.5%.

The drop in display advertising revenues was considered to be particularly bad news, because it decreased Yahoo!’s portion of the U.S. market to 9.3% from 11% in 2011, while its chief competitor Google Inc (NASDAQ:GOOG) increased its market share by 2% to 15%, and Facebook Inc (NASDAQ:FB)’s market share came in at 14%.

Yahoo! Inc. (NASDAQ:YHOO) not only lost advertising market share to Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB), it lags behind its two top competitors in the important area of revenue growth. For instance, Google Inc (NASDAQ:GOOG) grew year-over-year quarterly revenue at a rate of 6.7% versus Yahoo!, whose year-over-year rate of quarterly revenue growth was 1.6%.

Facebook Inc (NASDAQ:FB) increased its year-over-year quarterly revenue at a rate of 40.1 %. The fact that a company like Facebook Inc (NASDAQ:FB) can increase revenues at such a rapid pace indicates that the business display advertising market is still wide open. Perhaps, with time, Yahoo! will be able to grow advertising revenues at a rate that is similar to Facebook Inc (NASDAQ:FB).

Yahoo!’s change in direction

It is very striking that Yahoo! Inc. (NASDAQ:YHOO)’s fourth-quarter earnings were nearly identical to those from last year. The same is true for its annual earnings. Its annual revenue was $4.986 billion in 2012, compared to $4.984 billion in 2011. The annual earnings per share differed, but only because of a one-time transaction.