Yahoo! Inc. (YHOO): Possible Downside to This Tech Giant

The share price of Yahoo! Inc. (NASDAQ:YHOO) has moved up more than 35% YTD. The company’s stock has reached multi-year highs, and is looking to move up even higher. The company is making changes to its core business segments, and making a number of acquisitions to make its business more social and mobile as well. But with such renewed optimism surrounding the company, it is worth taking a look at the possible downsides of an investment in Yahoo! Inc. (NASDAQ:YHOO)

1. Search Partnership

Yahoo! Inc. (NASDAQ:YHOO) partnership with Microsoft Corporation (NASDAQ:MSFT) is still not working out as expected. Yahoo’s search revenues saw a 10% Y/Y decline in 1Q13. The number of paid clicks did grow 16%, but the price-per-click came down by more than 7% Y/Y. Yahoo is working to enhance its underlying search products but the results are less than stellar thus far.

Yahoo remains heavily reliant on Microsoft Corporation (NASDAQ:MSFT) for search and advertising services on its platform, and gets the 88% revenue share from Microsoft. Yahoo! Inc. (NASDAQ:YHOO)’s ongoing partnership with Microsoft Corporation (NASDAQ:MSFT)’s Bing search engine is limiting the possible growth of Yahoo’s search engine. The company’s search revenues of $425 million in the last quarter were the lowest in the last 9 quarters.

In the U.S. search market, Microsoft continues to gain market share at the expense of Yahoo. According to comScore, Yahoo now controlled 11.4% of the U.S. search market, and Microsoft’s share stood at 17.9% increase. Microsoft Corporation (NASDAQ:MSFT)’s Bing is cannibalizing its search partner, Yahoo! Inc. (NASDAQ:YHOO).

2. Online rivals becoming powerful

Yahoo competes with a broad range of Internet rivals that are becoming stronger than ever. Yahoo! Inc. (NASDAQ:YHOO)’s lead competitor, Google Inc (NASDAQ:GOOG) is increasingly becoming more dominant in search and online user-generated video, and ad networks. Google has controlled more than 60% of the search market for years, but is now getting a strong lead on online video with YouTube which has more than 1 billion monthly users.

Users can migrate into the services of other competitor services like Google Inc (NASDAQ:GOOG)’s Gmail and Microsoft’s Outlook. Yahoo’s position on mobile devices is less than stellar, which makes the company particularly vulnerable to fickle consumer tastes, and at the risk of losing out to competing firms.

Numerous Google and Microsoft Corporation (NASDAQ:MSFT)’s online division compete with Yahoo! Inc. (NASDAQ:YHOO) directly heavily for users, time spent and advertising dollars. As a result, Yahoo’s ability to innovate and move quickly in line with other competitors will be crucial for the company’s long-term success.

3. A delayed Liquidity Event of Alibaba

Share price and the company’s fortunes, at large, are heavily correlated with the company’s stake in Alibaba. Alibaba doesn’t seem to be overly excited about doing an IPO yet, and speculations have been rife about its possible listing whether in the U.S. Markets or in Hong Kong. The recent rally of Yahoo’s stock has been driven heavily by share repurchases, and an increase in the perceived value of its equity position in Alibaba.