It’s the one-year anniversay of Marissa Mayer taking over as the CEO of the Internet site for old geezers, Yahoo. That means it’s cause for the Silicon Valley sycophants to celebrate. But has anything really changed?
Yes, Yahoo stock price is up — about 75% in one year. So by many short-term measures, Mayer’s term is a success. She’s ordered home-office slackers (ahem) out of the system, she’s giving away free tech goodies, and she charms the press. She’s snapped up a bunch of flashy Internet tech startups, including Tumblr.
But let’s face the reality, Yahoo is still an old-school Internet media property. It’s for people who still listen to Bruce Springsteen (that’s okay, I listen to Springsteen — part of my point).
In the Internet, where new technology can take off in a matter of weeks, this is the equivalent of a Web property with a walker. I still use Yahoo for it’s iconic Yahoo Finance site, but little else. I wouldn’t touch its email system, which has the pedigree of a Chevy Caprice. Let’s face it, compared with Gmail, Twitter, and Snapchat, Yahoo is not hip. And buying Tumblr doesn’t make you hip, it just makes Tumblr less hip — for a whole lot of money.
Then you have to look at the cold, hard business reality. Yahoo competes with Google, the massive market leader in Internet search and display advertising revenue. And Google has made aggressive moves in mobile. Is Mayer really going to catch Google? I don’t think so.
You see, even if Yahoo can resume moderate growth (so far, there’s only a small blip of growth), Google is growing much faster. And Google’s lead in market share in search and display ad revenue remains solid, it’s not going anywhere. According to eMarketer, Google recently held about 73% share in search and Yahoo hled 6.5%. Estimates see Google’s lead actually increasing in the next few years.
So what about finances? Overall, the run rate of Yahoo’s year-over-year revenue and profit is basically flat, even though the last few quarters have shown a slight uptick in ad revenue.The last two quarters, Yahoo has done about $2.5 billion in revenue. In 2012 it did $5 billion in revenue. So the needle hasn’t really moved.
As for profitability, Yahoo’s operating income has run about $374 million in the fourth quarter, which is about a $750 million annual run rate — keeping in mind that the fourth quarter is always the biggest. Analysts expect $1.41 in earnings this year. Multiple that by a modest P/E of 15 and you get a stock worth about $21 a share. Yahoo is currently worth $27 a share, or $30 billion in market capitalization. That’s a huge growth in market capitalization — about 75% in the last year — for financials that have not shown a proportional surge.
So let’s recap: Yahoo CEO Marissa Mayer has won the PR battle and captured the imagination of the press and Wall St., driving the stock up nearly 75% since she took over. She has overhauled the culture and injected new life into the company. But so far, on the income statement, she hasn’t moved the needle. She’s looking at a chasing a market leader with a 74% market share, when she’s got about 5%. She’s got a lot of work to do.
You could argue that with a tech-savvy M&A strategy, this overhaul is going to take years to play out. I don’t buy it. Yahoo’s core business is display advertising. Display advertising is gradually going to be a sideshow compared with mobile advertising, where there are lower CPMs (advertising rates). Yahoo isn’t a leader in display advertising, and it’s not yet a leader in mobile, and its mobile deals have been inconsequential.
In short, Yahoo is a third-rate Internet advertising company. Nothing has changed. The stock has priced in a lot of change, so investors will need to see major changes take effect in order to ratify the hype and the valuation.