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Should You Buy Yahoo! Inc. (YHOO)?

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Now that Yahoo! Inc. (NASDAQ:YHOO) is very much in the limelight after acquiring Tumblr, it is obvious that many investors have a question: “Should I invest in Yahoo!?” So, let’s examine some parameters before drawing any conclusions.

Revenue from search

In 2012, the management structure of the company changed a lot, with the most prominent change being that Marissa Mayer was introduced to Yahoo! Inc. (NASDAQ:YHOO) as the new CEO. It has been very evident that Mayer has put in a lot of hard work since then. We have seen that she has been trying many things to boost Yahoo!’s market position.

mayer-tumblr

Mayer tried to break-free from the search and advertising services and sales agreement (“search agreement”) with Microsoft Corporation (NASDAQ:MSFT), according to which Microsoft is the exclusive algorithmic and paid-search service provider for Yahoo! Inc. (NASDAQ:YHOO).

However, to date, there has been a gap in revenue per search (RPS) between pre-transition and post-transition periods, and Microsoft Corporation (NASDAQ:MSFT) has been making payments under the RPS guarantee to compensate for the difference. So there is a clear decline in search revenue.

On April 30, Microsoft extended the RPS guarantee for another 12 months commencing April 1. After one year, if Microsoft fails to deliver on RPS, Yahoo! Inc. (NASDAQ:YHOO) potentially could abandon the 10-year deal. Yahoo! has been in talks with Google Inc (NASDAQ:GOOG) to provide Yahoo! with a search-ad partnership.

Google Inc (NASDAQ:GOOG) has been the best player when it comes to search and advertisement. Mayer’s experience at Google for more than 13 years before joining Yahoo! Inc. (NASDAQ:YHOO) will be very useful for Yahoo! in improving its search market share.

Microsoft is in full-force to improve its search. Microsoft is planning to integrate search with all of its products. Microsoft believes typing in a search box will not be the search model in the years to come. The company is coming up with a Siri-like model for complete digital assistance.

What if Yahoo! and Microsoft’s deal continues??

Yahoo!’s search revenue increased by 6% in 2013 Q1 as compared to 2012 Q1. If Microsoft is able to be successful, then Yahoo! may consider holding the deal. Another reason is that in 2008, Yahoo! did try to sign the deal with Google, but Justice Department antitrust officials didn’t approve that. If Yahoo! faces the same resistance again, then it is very likely that it will not be ending the search-ad deal. This means that Google will be losing out on a very big deal.

The Yahoo-Microsoft tie-up will also affect Google’s search market share. In the last quarter, Google’s market share dropped to 69.2% from 69.7% whereas Bing’s search market share rose to 26.1% from 25.9%. Even though the difference is not significant today, in the future Microsoft’s attempt to make search more intuitive can turn the tables.

What if Yahoo!-Google teams up?

Yahoo! is making many attempts to get a deal done with Google. A deal can bring Yahoo! hundreds of millions of dollars in profit, and a deal would bring a lot of money to Google, too. Its search market share will also increase. The Yahoo!-Google duo could hit Microsoft badly, and Microsoft’s market share could fall further. Microsoft needs Yahoo! more than Google.

Until the time comes when Mayer can choose between Microsoft and Google, an attempt is being made by Yahoo! to improve the user experience for search by changing the look and feel of it. However, that might not be a powerful weapon to increase Yahoo!’s market share significantly.

Income from investments

Yahoo! has a good investment profile, which includes government, agency and corporate-debt securities, time deposits with financial institutions, money market funds and preference shares of the Alibaba Group. Fixed rate and fixed income securities can adversely affect its fair value if interest rates fall or if credit quality of the issuer deteriorates. However, Yahoo! has no current requirement or plan to sell securities in an unrealized-loss position.

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