In just a year, Yahoo! Inc. (NASDAQ:YHOO) has gone from a company nobody cared about to one of the most followed publicly traded companies around. Yahoo! hired former Google Inc (NASDAQ:GOOG) executive Marissa Mayer as CEO about a year ago, following six different CEOs in the preceding six years. Mayer wasted no time revamping the company, including redesigning Yahoo! Inc. (NASDAQ:YHOO)’s home page, email service, and Flickr photo service. She has also bought 17 companies, including the $1 billion acquisition of micro-blogging site Tumblr.
The results, however, are so far mixed. When Yahoo! Inc. (NASDAQ:YHOO) reported Q2 earnings on Tuesday, revenue declined by 7% year-over-year, or 1% if traffic acquisition costs are excluded. EBITDA also fell by 7% while non-GAAP operating income decreased by 13%. Net income, however, rose by 46% as results from equity interests in a couple of companies drove Yahoo! Inc. (NASDAQ:YHOO)’s earnings higher.
Backing out cash and investments
Yahoo is currently valued at about $29 billion, and the stock has increased by about 85% from its 52-week low.
But this performance was driven mainly by the performance of the company’s investments, namely Alibaba. Yahoo! owns about 24% of the private company after selling part of its stake last year. It also owns 35% of Yahoo! Japan, a stake worth about $10 billion based on current market prices. Based on the price Yahoo! got on its sale of part of its stake in Alibaba last year, the company’s current stake is worth about $8 billion. Backing these investments out, along with the $4.8 billion in cash, brings Yahoo! Inc. (NASDAQ:YHOO)’s enterprise value down to just about $6 billion.
The core businesses
Yahoo!’s net income includes contributions from these stakes, but since I’ve accounted for them directly those contributions need to be backed out as well. In 2012 the company had operating income of $566 million, which based on a 35% tax rate would leave about $370 million in net income. This puts Yahoo! Inc. (NASDAQ:YHOO)’s enterprise value at about 15 times core earnings. It’s not cheap, but it’s not all that expensive either.
The problem is that Yahoo!’s core businesses aren’t doing that well. The company is guiding for between $630 – $720 million in operating income for the full year, up from last year but still lower than both 2010 and 2011’s results. The guidance for full year revenue is between $4.69 and $4.82 billion, down from last year.
Yahoo’s display ad business had a rough quarter. The number of ads sold dropped by 2% year-over-year while the price-per-ad plummeted 12%. Marissa Mayer has only been on the job for a year, but its clear that Yahoo!’s core businesses needs a to turn a corner.
The future has potential
It’s hard to tell what Yahoo! will look like five or 10 years from now, but the company is trying to increase the number of users of its various websites and services. After the redesigns ordered under Mayer the number of daily active users of the Flickr photo app rose 50% while use of mobile e-mail climbed by 70%. And the acquisition of Tumblr is expected expand Yahoo!’s audience by 50%.
But users don’t equal profits, as many Internet start-ups are realizing. Yahoo! has bought a lot of companies, including Tumblr, which generate very little revenue and are currently unprofitable. Especially with Tumblr, there’s a balance between monetization and user experience, and if Yahoo! is too quick or too aggressive with advertising the platform could fall apart in its hands.
All of the moves Mayer is making are long-term, meaning that there likely won’t be any payoff in terms of profit for at least a few years. In the short term, Yahoo!’s ad business is in decline, which needs to be reversed. Yahoo! Inc. (NASDAQ:YHOO)’s share of the online ad market is expected to slip to just 3.1% this year, down from 3.4% in 2012. Google Inc (NASDAQ:GOOG)’s share is expected to rise to 33% from 31%, and Facebook Inc (NASDAQ:FB)‘s share is expected to hit 5% from 4.1% last year.
Yahoo! is trying to follow a similar strategy to Google Inc (NASDAQ:GOOG), not a surprise given Mayer’s ties. Google built a bunch of very popular web services, like Gmail and Google Docs, in order to drive users to rely on the company’s products. With the most popular search engine, the leading mobile phone operating system, YouTube, and many other products it’s difficult for someone to not use a Google product.