Yahoo! Inc. (NASDAQ:YHOO) may be transitioning away from a purely advertising-driven business model. While it is true that the company’s core thesis is in large economies of scale and large scale advertising, the company’s business will have to change in order to sustain higher rates of revenue growth going forward.
Yahoo! has been growing
Yahoo! Inc. (NASDAQ:YHOO) has been able to increase the number of search queries for its business, but at extremely low rates. The company’s core advertising business seems to have fully matured. While there may be opportunities in emerging market economies, I think that the company’s strategy of brand-extensions will come to an end. That’s not necessarily a bad thing though. It just means that the company will be more focused on growing its business outside of banner advertising.
Currently Alexa ranks Yahoo! as the 4th most visited website in the world. Its’ positioning will not change by much. The company isn’t hoping to increase the number of visits on its websites, but rather to increase the amount of profit generated from each user. The company is focused on reducing spending, increasing the number of talented employees, and acquiring other companies.
Yahoo! Inc. (NASDAQ:YHOO) provided revenue guidance of $4.5 to $4.6 billion for the 2013 fiscal year. In 2012, the company generated $5 billion in revenue, but the company is projected to generate a 10% haircut on revenue. On the bright side, the company will be reporting Non-GAAP operating income of $1.1 billion for 2013. Comparatively in 2012 the company reported $566 million in Non-GAAP operating income. The operating income is expected to double in 2013.
Advertising revenues will comprise a vast majority of the company’s revenue stream over the short-term. Over the long-term, the company will become increasingly dependent on its search-engine business, and alternative business models.
Google another compelling investment opportunity
While Yahoo! has a clear investment thesis, investing in Google Inc (NASDAQ:GOOG) is a no-brainer. Almost every forward-looking forecast assumes that Google’s growth will be driven by search and mobile.
Mobile computing will continue to grow at astounding rates. The tablet business is driven by emerging market economic growth, paired with declining costs of owning a personal computer. In the future, laptops are expected to be displaced by $300 tablet devices. Tablets are portable, cheap, and less expensive than the Windows ecosystem surrounding laptops.
Believe it or not, tablets provide enough screen space for visual ads to be displayed. Some of the issues in mobile are slightly off-set by the rapid growth in the tablet market. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) projects that tablet demand will grow at a 23% compounded annual growth rate. Google Inc (NASDAQ:GOOG)’s banner advertising business (Google Adsense) should sustain high rates of growth. But more importantly its’ search business will benefit from both the rapid growth in smart phones and tablet devices. Because of this, Google will remain well positioned going into the future.
