Yahoo! Inc. (YHOO): How Should You Play It?

Yahoo! Inc. (NASDAQ:YHOO)  has been under close watch by investors. The company brought on a new CEO and is focused on growing profitability. With recent earnings and new strategies, what should investors think of Yahoo?

Earnings report

Yahoo! Inc. (NASDAQ:YHOO) recently reported its quarterly earnings, and results were mixed. On the positive side, earnings per share were $0.35, which was almost 50% higher than analysts expected.

Revenue was flat, though. Total revenue after what Yahoo! Inc. (NASDAQ:YHOO) pays other websites for carrying ads was $1 billion–this was just below than Wall Street expectations of $1.1 billion.

Yahoo! Inc. (NASDAQ:YHOO) makes the majority of its revenue in two different segments: advertising displays and search. In the most recent quarter, advertising revenue fell by 11%, while search revenue grew by 6%.

The stock price dipped on this news, but has increased by nearly 50% in the last nine months. Yahoo!’s CEO, Marissa Mayer, has initiated new offerings in its email platform to integrate with Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) mobile-operating systems. This has caused the user base to grow by 50% quarter-over-quarter.

Yahoo! Inc. (NASDAQ:YHOO)’s earnings were boosted by its holdings in Alibaba, a Chinese marketplace website. Still, 40% of total earnings come from ad revenue, which have been declining.

Competition

Online-ad revenue is important to more companies than just Yahoo!. Two other companies that rely heavily on ad revenue are Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB) .

Facebook reported advertising revenue of $1.3 billion in its fourth quarter. Advertising comprises 84% of its total revenue. While Yahoo! Inc. (NASDAQ:YHOO) hasn’t been growing its ad revenue, Facebook has and delivered an increase of more than 40% in the last year. The company also focuses on mobile platforms, and mobile advertisements make up roughly 21% of revenue.

The company has been faced with growing operating costs, though. It will have to grow its revenue at a higher rate this year to offset rising expenses. Operating expenses are already 74% of revenue, up from just 63% the same time last year.

Facebook Inc (NASDAQ:FB) has been developing a new way for businesses to track conversions with advertisements. Having this easy-to-use platform could bring more advertisers to Facebook.

Total mobile advertising spend will reach $12 billion this year. More companies are choosing mobile advertising, so it’s up to Internet companies to offer strong incentives; Facebook Inc (NASDAQ:FB)’s advertising tracking is a good start for the company.

Google Inc (NASDAQ:GOOG) has a much stronger revenue growth rate than Yahoo! Inc. (NASDAQ:YHOO). It has grown its top line by 36% in the last year. Google is Yahoo!’s major competitor for online searches and subsequent ad revenue; 96% of all revenue come from advertisements, with the majority coming from Google websites.