I’m a Yahoo! Inc. (NASDAQ:YHOO) bull. I’ve had a good run since Marissa Mayer took over. But I haven’t yet seen organic growth.
What helps me remain bullish is that she seems to have a vision for the company, one that she seems to be executing.
So let’s talk about that vision, what might cause me to change my view, and why – if you’re looking for tech profits – it remains a solid choice for capital gains.
The Yahoo! story
For over a decade Yahoo! Inc. (NASDAQ:YHOO) did what Wall Street told them. It became a media company. It has major assets in finance, news and sports. It has a radio network.
From her first interview, Mayer set out to change that. She said Yahoo! should be a tech company again. That would mean dramatic increases in the number of highly-skilled developers and entrepreneurs within the company. It would be expensive, but Yahoo! Inc. (NASDAQ:YHOO) was already the birthplace of key cloud technologies like Hadoop, and if led by an engineer techies respected, it could turn around.
The Tumblr acquisition was a key point in this transformation. Mayer shopped carefully for nearly a year before pouncing on this company. What was Yahoo! thinking, our Daniel Sparks asked.
Here’s what they were thinking. Tumblr was a cloud development company, based in New York, with an offer that Madison Avenue and the Rocks (where the networks live) both found compelling. It had a user base that could be monetized, but most important it had a staff that understood how to bring a cloud-based consumer product to market, scaled and ready for the millions.
Yahoo! Inc. (NASDAQ:YHOO) has since furthered what the media calls its “quest for youth” by buying PlayerScale, which helps game makers port their products to a variety of different platforms.
You need to understand here that the “quest for youth” doesn’t just revolve around users. It involves developers. Yahoo! needs a large, cohesive development team that can imagine new cloud applications, build them, and maintain them, at a pace competitive with its key competitors, like Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB). (More on them soon.)
The Yahoo! danger
Yahoo! Inc. (NASDAQ:YHOO) isn’t Google Inc (NASDAQ:GOOG). That’s good. It has a lot of room to grow, which means investors have a lot of room to profit in the form of capital gains, before it hits anything like a ceiling. Since Yahoo! doesn’t yet have as much data center capacity as Google, it also has an advantage in that it can build from scratch, using 2013 pricing and technology, rather than being limited by what Google Inc (NASDAQ:GOOG) built in the last decade.
The danger is that it fails to keep its teams together. Many tech companies buy operating companies and then let the developers walk out the door. Yahoo! Inc. (NASDAQ:YHOO) can’t afford that. It has to keep its Tumblr and PlayerScale people inside the company, not only building out what they have but building additional teams within Yahoo! for other products. Making Yahoo! a competitive cloud development shop is Mayer’s primary mission, that means young developers with cloud skills, and 2013 work habits.
So if you see job hops about Yahoo! Inc. (NASDAQ:YHOO) programmers leaving in droves for start-ups, or see its competitors picking up top Yahoo! developers for new projects, that’s a danger signal. That’s when you need to question your investment in Yahoo! and consider taking your profits out.
