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.
Yahoo’s 24% stake in Alibaba is very valuable for the otherwise struggling Yahoo! Inc. (NASDAQ:YHOO). Numerous estimates have pegged the total value of Alibaba to be in the range of $80 Billion-$120 Billion, which is a great positive for the company. However, if Alibaba continues to delay its IPO or any other liquidity event, Yahoo’s intrinsic value from this asset will be less transparent. As a result, the company’s share price will remain within a narrow range, and will have limited upside from current levels especially after a strong run-up.
4. Reduction in Advertising spend
In the first quarter of 2013, Yahoo’s display advertising business saw a whopping 11% decrease. Yahoo! Inc. (NASDAQ:YHOO) is showing lower number of ads, and the price per ads is down as well. Part of Yahoo’s decline on the display advertising was the company’s efforts to cut down on display clutter, which is commendable because it is trying to improve the end-user experience.
However, the number of ads shown on various Yahoo properties should be a big concern for Yahoo investors. Google Inc (NASDAQ:GOOG) along with Facebook Inc (NASDAQ:FB), AOL, Inc. (NYSE:AOL), Yahoo! Inc. (NASDAQ:YHOO), and Microsoft control roughly two-thirds of the online advertising market, according to eMarketer. The online advertising market is extremely competitive with newer entrants wanting a piece of the pie for users, and the time spent by those users. If Yahoo fails to get its momentum back in its display advertising properties, the company’s overall fortunes will be affected substantially.
The Takeaway
Yahoo’s stock has done very well in the last year. Since its core business is not showing signs of growth, it might be a good idea to be a little skeptical of Yahoo stock. The company’s fortunes are heavily tied to the listing of Alibaba, which might not take place in the next few years. There are a number of downsides to the Yahoo! Inc. (NASDAQ:YHOO) story, but the company’s stake in Alibaba might be worth a lot more in the future.
Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google Inc (NASDAQ:GOOG). The Motley Fool owns shares of Google and Microsoft Corporation (NASDAQ:MSFT).
The article Possible Downside to This Tech Giant originally appeared on Fool.com.
Ishfaque 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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