Yahoo! Inc. (NASDAQ:YHOO) is making headlines regularly these days. I have been following this stock for quite some time now. Many interesting things are happening and Yahoo! is slowly but steadily picking itself up to match top players like Google Inc (NASDAQ:GOOG) and Amazon.com, Inc. (NASDAQ:AMZN). It is just a matter of time before this internet behemoth regains its past glory.
Change in top management a much needed relief for Yahoo!
After the dot com bubble burst, Yahoo! Inc. (NASDAQ:YHOO) became one of the most affected stocks. As it stands out, the internet giant is trading at one-fifth of its peak market capitalization, currently at $29 billion. It has lost much of its value over the years, trying to fix its wings broken by companies like Google Inc (NASDAQ:GOOG), which continuously innovated and marched ahead. However, digging further, we see that much of Yahoo!’s problems were attributed to its internal management issues.
Consider this fact, the stock has jumped a massive 55% after Yahoo! Inc. (NASDAQ:YHOO)’s present CEO and an ex-Googler, Marissa Mayer, was inducted into the company in July 2012. What the new CEO is doing is a more dynamic approach to revenue generation strategy and product offering. This certainly is helping Yahoo!’s cause and Marissa Mayer is steering the ship in the right direction.
Why is revenue dwindling?
Google Inc (NASDAQ:GOOG) has maintained its dominance in the U.S. search engine market with a staggering 67% market share. Yahoo! is just 12%, even behind Bing at 17%. The loss in search engine market share has been the major cause for the downfall in revenue of Yahoo!. Although Yahoo! Inc. (NASDAQ:YHOO) beat earnings estimate by $0.14 a share in Q1, display advertising revenue actually fell by 11% which is a big dent to its growth strategy. Yahoo! needs to do something about this, and since mobile is the new buzzword, it ventured big into this market to arrest the loss in revenue from the search engine and PC display ad market.
Yahoo! betting big on mobile
Yahoo! Inc. (NASDAQ:YHOO) has revamped itself from being a search engine into a complete technological interface now. Like other internet giants, Yahoo! accumulates most of its revenue from advertising. But what about mobile? The world is becoming more app-based than PC-based now and more and more people prefer smartphones and tablets to browse and connect socially. Big problem for Yahoo? The clicks generated on ads are much less than they are on desktops, as such, the margins becomes low when it comes to mobile.
Yahoo! figured out this problem and has taken some steps like launching Yahoo.com (NASDAQ:YHOO) mobile site and acquiring some mobile start-ups like Snip.it, Jibe, and Alike etc. Additionally it is launching exciting new mobile apps for its mail, news, and weather services. This strategy, coupled with well placed ads and new applications, have tremendous potential and will diversify Yahoo! Inc. (NASDAQ:YHOO)’s revenue stream. Moreover, Yahoo! has already witnessed the success from mobile advertising from its Japanese counterpart, Yahoo! Japan, where Yahoo! is the main search engine even ahead of Google, unlike the U.S.
Backed by strong financials
Yahoo! possesses a strong balance sheet with a total cash component of $3 billion. This helps to acquire potential start-ups like it purchased Summly for a reported $30 million. Tumblr is going to give a big boost to the company.
Q1 performance was better than last year, although revenue declined 6% year on year. Yahoo! Inc. (NASDAQ:YHOO)’s paid clicks grew 16% during the quarter. One good thing for shareholders is the recent buyback of 38 million shares in Q1. Yahoo! is set to bring in more cash if Alibaba goes on to make a successful IPO sometime in the future. Alibaba works much like eBay Inc (NASDAQ:EBAY) and its business model has proved to be highly sustainable and the company is raking in huge profits. Analysts already deem Alibaba to be worth $100 billion. Yahoo! owns just 23% of Alibaba, but keeping in mind Alibaba’s strong prospects, it can turn out to be a huge cash cow for Yahoo!.
Coming to the P/E ratio, Yahoo! Inc. (NASDAQ:YHOO) is trading cheap at 18 times trailing twelve months earnings, compared to its peers at 25x. The forward P/E estimated is at 17.5x, lower than the industry’s 22x. This means that Yahoo! does not have to worry about some premium it gathers by acquiring start-ups. It can even do that with a small amount of leverage, considering the fact that Yahoo! is virtually debt free. Compared to Google Inc (NASDAQ:GOOG) (64%) and Microsoft Corporation (NASDAQ:MSFT) , the gross margin of Yahoo! is at a staggering 80%, even more than the industry (70%).
Microsoft has been a strong performer this year, delivering a return of more than 30%. The gross margin of Microsoft Corporation (NASDAQ:MSFT) is much lower than Yahoo! Inc. (NASDAQ:YHOO), however the stock continues to attract value investors with its low PEG and P/E ratio. The cash flow component is also more than Yahoo!. After the not-so-successful response of the Surface tablet, it remains to be seen how Microsoft plays its cards with such a strong balance sheet. Notwithstanding competition, Microsoft Corporation (NASDAQ:MSFT) still carries a lot of value.
Google appears to be trading at a premium with a P/E of 26 compared to Yahoo!. At $873, it holds a downside risk and I would not prefer to hold the stock at current levels. It has generated a handsome return of 46% over the past one year. The growth rate seems sustainable, but whether the stock is trading at a fair price is a concern, especially when Google Inc (NASDAQ:GOOG) has not performed well in any of its profitability metrics.
To sum up, my take
With the ushering in of a fresh management and a focus on the right things, Yahoo! Inc. (NASDAQ:YHOO) should get better from here. Yahoo! is now breathing easy and the best part — it has recognized its hidden potential. The brand equity is still as strong as it has always been. The stock has already started bouncing back and I believe in the next few quarters, Yahoo! Inc. (NASDAQ:YHOO) will stand where it truly deserves to be. And I will not be surprised if it poses a threat to other internet giants.
Tanya Kanodia 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 This Internet Behemoth Is Set to Regain Its Past Glory originally appeared on Fool.com.
Tanya 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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