Given Yahoo! Inc. (NASDAQ:YHOO)’s recent earnings results, the core business appears to be deteriorating. The stock may continue to hold up given the hope for Alibaba’s IPO, but once that’s over, investors would be wise to consider getting out.
Alibaba is the Amazon of China
Alibaba has been called the Amazon.com, Inc. (NASDAQ:AMZN) of China. Actually, it’s more than the Amazon.com, Inc. (NASDAQ:AMZN) of China, as it generates more revenue than Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) combined.
Luckily for Yahoo! Inc. (NASDAQ:YHOO) shareholders, the company was wise enough to invest in Alibaba years ago. That investment has done incredibly well. Alibaba could be worth $70 billion, and Yahoo! owns nearly a quarter of the company.
When Alibaba IPOs, it has the right to buy half of Yahoo! Inc. (NASDAQ:YHOO)’s stake, or force Yahoo! to sell it into the market. Either way, Yahoo! is poised to get a big chunk of money once Alibaba begins trading.
Yahoo!’s core business is deteriorating
But once Yahoo! has sold off its Alibaba stake, what’s left? Unfortunately, not much.
In its earnings report, the company revealed that ad prices had declined by 12% in the second quarter. At the same time, the company cut guidance for revenue this year.
Earlier this week, comScore said Yahoo! Inc. (NASDAQ:YHOO)’s search market share search had declined, now down to just 11.4% of the market.
Can Yahoo! be turned around with acquisitions?
Since Mayer took the role, she’s been using an acquisition strategy to try to turnaround the company. Most of these have been small buys, with the goal of bringing in top engineering talent.
But Yahoo! has made one major acquisition — Tumblr. Can Yahoo! Inc. (NASDAQ:YHOO) actually justify the $1.1 billion it paid for Tumblr? That remains to be seen.
Monetizing Tumblr seems far from an easy task. As Jim Edwards at Business Insider notes, from an advertising standpoint, Tumblr suffers from numerous problems. Namely, it doesn’t really know who its users are — making targeted ads all but impossible.
Are more acquisitions coming?
In the past, I’ve speculated that Yahoo! could be interested in acquiring other major (but smaller) Internet properties like Yelp Inc (NYSE:YELP) or OpenTable Inc (NASDAQ:OPEN).
Back in March, Kara Swisher reported that Yahoo! was interested in making two major acquisitions. Tumblr was obviously the first, but the second has yet to materialize. Yahoo! has been linked to DailyMotion and Hulu, but neither of these deals have gone through.
On the earnings call, Mayer addressed the company’s M&A strategy, emphasizing smaller deals with the goal of bringing on engineering (particularly mobile engineering) talent. She said that big deals like Tumblr wouldn’t happen on a regular basis.
While that doesn’t preclude a deal altogether, it doesn’t make much sense for Yahoo! to acquire Yelp or OpenTable Inc (NASDAQ:OPEN) at this point.
Yelp Inc (NYSE:YELP) would give Yahoo! Inc. (NASDAQ:YHOO) a play on the growing local trend, and a popular mobile app, but given that Mayer has admitted that Yahoo! won’t be pursuing mapping, buying Yelp Inc (NYSE:YELP) just doesn’t fit. Her former company, Google, bought Yelp’s rival Zagat in 2011 so that it could incorporate its reviews into Google Maps. Without some sort of play on mapping, it’s difficult to see how Yelp would fit into the larger Yahoo!.
As for OpenTable Inc (NASDAQ:OPEN), the issue is much the same. Mayer has said she wants to focus Yahoo! around what people do on their mobile phones — weather, news, social networking, etc — and while OpenTable has a popular mobile app, its singular focus on restaurant reservations seems too limited for Yahoo!.
To put it another way, a company like Tumblr could conceivably be scaled for use by all of Yahoo!’s visitors — OpenTable, while a promising business model, appears to be limited to restaurant goers in urban areas.
Given that both Yelp and OpenTable have seen their stocks rally on Yahoo!-related rumors, investors in these companies should be aware of Yahoo!’s plans when it comes to further acquisitions.
Investing in Yahoo!
Yahoo! has been a terrific stock to own over the last year, but not reasons of its core business. Rather, Alibaba — of which it owns 24% — has appreciated significantly.
In fact, despite all the hype Mayer has received, Yahoo!’s core business may actually be deteriorating at this point.
The hype surrounding Alibaba should protect Yahoo!’s shares in the near-term, but once the company divests itself of its Alibaba stake, the Yahoo! Inc. (NASDAQ:YHOO) story will change dramatically. At that point, investors will have to focus on core Yahoo! — and right now, it isn’t pretty.
The article Once Alibaba is Gone, it Might Be Time to Sell Yahoo! originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends OpenTable. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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