This is one reason why Yahoo! stock resumed its upward momentum in September, despite the fact that it has yet to show organic growth – it next reports results in October. Google Inc (NASDAQ:GOOG), meanwhile, has seen its top line stall out. Revenue for the last six months is up only 2% from the previous six months.
The cost of revenue in this business is rather stable. It’s sort of like the airline business, in that your load factor determines your profitability. Web companies like Google Inc (NASDAQ:GOOG) and Yahoo! have to keep increasing the amount of traffic they carry in order to maintain their fat margins, and any slowdown has to look a little dangerous.
Cash flow is often seen as seasonal in this business, so investors are not yet troubled by Google Inc (NASDAQ:GOOG)’s slower growth. But quarterly cash flow for Google was little changed in 2013 from its 2012 rate, in the second quarter. If growth is going somewhere else, investors should be careful putting money into a stock with a Price/Earnings multiple near 28, which is where Google Inc (NASDAQ:GOOG)’s was as this was written.
Investors aren’t ignoring this trend. In the last month Yahoo! is up nearly 8% while Google is up by less than 1%.
But here’s a second reason to see brighter prospects for organic growth at Yahoo!. Yahoo!’s new iOS application, Yahoo! Screen, provides a preview service for videos that acts, from a financial standpoint, much like the News application does. Before launch the company signed financial agreements with major content providers, including Viacom companies that formerly resisted links from major Web content providers, accusing YouTube of “stealing” their content for instance. Google Inc (NASDAQ:GOOG) has won the resulting lawsuits, but this has not made Viacom more eager to do business with it.
Yahoo! Screen can do for Yahoo! traffic precisely what Yahoo! Inc. (NASDAQ:YHOO) News is doing, only more so. As the value of video traffic is now higher than that for print – it costs more to serve but not that much more anymore – Yahoo! Screen should be a significant profit driver.
Final thoughts
By providing a valid method for content providers to license their material and gain reach, Yahoo! is building a huge content library at minimal cost. As users realize this, you should start to see organic growth in page views, in advertising revenues, and in overall revenues.
The market has not yet caught on to this innovation fully, so you have plenty of time to get in.
The article Yahoo!: The New King of News? originally appeared on Fool.com and is written by Dana Blankenhorn.
Dana Blankenhorn owns shares of Google and Yahoo!. The Motley Fool recommends Google and Yahoo!. The Motley Fool owns shares of Google.
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