Google and Facebook
Let’s also take a look at two possible alternative investments before we go, Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB).
Google has massive advantages over Yahoo! Inc. (NASDAQ:YHOO) in terms of its infrastructure and costs. It is also achieving organic growth from in-house developers who can both create new products and enhance existing ones to keep them competitive.
But like every big company – like Apple Inc. (NASDAQ:AAPL) for instance – Google Inc (NASDAQ:GOOG) is reaching a ceiling. It had $500 million less in revenue during the March quarter than in December. Bulls will say that it’s all seasonal, that the March quarter was 30% better than what was achieved a year earlier. But as numbers get bigger they get harder to grow. Apple Inc. (NASDAQ:AAPL) has found that out. When investors realize that’s true with Google as well, there will be a reckoning, and today’s earnings multiple of 26 will start to look terribly expensive next to Apple Inc. (NASDAQ:AAPL)’s 11. Yahoo! Inc. (NASDAQ:YHOO)’s is technically 7.5, but that’s artificial, the result of its sale of half its Alibaba stake last year.
Facebook offers a more direct comparison with Yahoo! Inc. (NASDAQ:YHOO). The two companies are relatively similar in terms of revenue – Facebook Inc (NASDAQ:FB) is 40% ahead of Yahoo! in terms of quarterly revenues, although Yahoo! was nearly twice as profitable last quarter, earning $390 million against Facebook’s $219 million.
The larger point is that these two companies are similar in the way they run. Both are scaled cloud development shops with their own data centers. Both target similar user bases, and both seek developers and entrepreneurs from the same pool. Facebook has proven it can get organic growth, in terms of new products and features, from its existing staff. That’s the model Mayer is trying to build inside Yahoo! Inc. (NASDAQ:YHOO).
The difference is that while Facebook Inc (NASDAQ:FB) does all its work from within a Silicon Valley corporate campus, Yahoo! is trying to spread its work around, while Mayer fixes what’s wrong at the center. My guess is that Tumblr may be just the first of several “mini-Yahoo! Inc. (NASDAQ:YHOO)s” around the world, built through acquisitions as Mayer seeks to create a network of entrepreneurial cloud development shops in major business centers.
My Foolish take
Right now Facebook has a market cap of about $60 billion. Yahoo! has a market cap of just $29 billion, and much of that is based on its continuing ownership of 20% of Alibaba, which has yet to develop an American arm or become the global power its founder Jack Ma wants it to be.
I see a lot more potential in Yahoo! Inc. (NASDAQ:YHOO) going forward than I do in Facebook Inc (NASDAQ:FB). The company is less than one-tenth Google Inc (NASDAQ:GOOG)’s size, by revenue, and thus has ample room to grow before worrying that top-line gains are difficult.
There is risk here. Mayer is key to Yahoo!’s success. She’s as important to her company as Zuckerberg is to his, even more important than Google CEO Larry Page is to his. She has not yet begun to fight.
The fight is going to be fun to watch.
The article What Can Stop Yahoo!? originally appeared on Fool.com.
Dana 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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