Declining ad revenue
In the second quarter 2013, Yahoo! produced more than $1.13 billion in revenue, 7% lower than the revenue of $1.22 billion in the second quarter last year. The decline in sales this year was mainly attributable to the decreasing revenue of both display and search advertising. However, its operating income surged by as much as 150%, from $55 million in the second quarter of 2012 to $137 million in the second quarter of 2013, mainly due to the much lower restructuring charges and lower traffic acquisition costs.
According to the Wall Street Journal, the Interactive Advertising Bureau reported that the U.S. online advertising market experienced good growth of 15% last year. However, Yahoo! Inc. (NASDAQ:YHOO)’s display-ad revenue – 40% of the total sales – experienced a 12% decline. The search-ad revenue also dropped by around 9%. In contrast, its peers, including Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB) have been growing their advertising revenue. In the first quarter 2013, Facebook’s advertising revenue increased by as much as 60% to $1.25 billion, accounting for 85% of its total revenue, while mobile advertising revenue represented around 30% of the total advertising revenue. Google Inc (NASDAQ:GOOG)’s revenue (including advertising and other) came in at $12.95 billion, 22% growth compared to first-quarter 2012 revenue of $10.65 billion. Most of its revenue, $8.64 billion – 67% of the total revenue – came from Google Sites.
The growth in EPS and potential share buybacks
The EPS came in at $0.30 per share, year-over-year growth of 68% compared to the EPS of $0.18 per share last year. However, Yahoo! has lowered its full-year guidance, which disappointed investors. The full-year revenue guidance has decreased from the range of $4.5 billion-$.4.6 billion to the range of $4.45 billion-$4.55 billion.
The growth in Yahoo! Inc. (NASDAQ:YHOO)’s EPS also resulted from the company’s share buybacks. In the second quarter, Yahoo! bought back 25 million shares for around $653 million. It reported that in the past several quarters, it had completed its commitment to return $3.65 billion to buy back 190 million shares from the Alibaba deal proceeds to shareholders. Looking forward, it expects to repurchase an additional $1.9 billion worth of shares, representing 6.5% buyback yield to its shareholders at the current market cap of $29.10 billion.
Are Google and Facebook better buys?
At $26.90 per share, Yahoo! Inc. (NASDAQ:YHOO) is valued quite expensively, at nearly 20 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Yahoo!’s valuation stays in between Google Inc (NASDAQ:GOOG)’s and Facebook Inc (NASDAQ:FB)’s. At $26.30 per share, Facebook is worth $63.64 billion. The market values Facebook at a much higher EBITDA multiple at 42.32. Among the three, Google seems to be the cheapest. At $919.60 per share, Google Inc (NASDAQ:GOOG) is worth $305.1 billion. The market values Google at 15.67 times its trailing EBITDA.
Investors might like Facebook Inc (NASDAQ:FB) with its leading global position in social with around 1.11 billion monthly active users. Thus, the market values each of Facebook’s users at around $57.85. The ownership of the huge amount of personal data around the globe is the invaluable asset for Facebook to monetize in the future. Google Inc (NASDAQ:GOOG), on the other hand, is the global leader in the search business, which brought a lot of ad revenue to the company.
Both Facebook Inc (NASDAQ:FB) and Google have been quite successfully penetrating the fast-growing mobile market. Facebook’s mobile monthly active users reached 751 million in the first quarter 2013, with a significant year-over-year growth of 54%. Google Inc (NASDAQ:GOOG), with the Android operating system, accounted for around 75% of the total smartphone market and more than 56% of the tablet market.
The world trend is moving to mobile and tablets. In order to stay competitive with Google and Facebook, Yahoo! Inc. (NASDAQ:YHOO) must spend both effort and capital growing the business in the mobile and tablet market. While Facebook Inc (NASDAQ:FB) has tremendous, invaluable personal data on more than 1.1 billion people, Google Inc (NASDAQ:GOOG) has its edge with search and its Android operating system. Yahoo! really needs to create strong and innovative products for users to stick to the site, which could in turn grow the company’s ad revenue in the long run. Its acquisition of Tumblr is expected to grow its audience to more than one billion monthly visitors.
My Foolish take
Personally, I was not excited about Yahoo! Inc. (NASDAQ:YHOO) at its current trading price because of its high valuation, sluggish 2013 outlook and declining ad revenue. Among the three companies, I like Facebook due to its huge personal data bank. I also like Google with its global leading position in the search market. Both companies will benefit a lot with their dominant positions in a fast-growing mobile market segment.
The article Is Yahoo! Expensive Now? originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG). Anh 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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