A Few Reasons Why Yahoo! Inc. (YHOO) Is Getting Better

AOL currently offers a majority of the services offered by Yahoo!, including weather, sports, and finance. Nonetheless, Yahoo! still maintains an edge over the New York-based AOL, and will look to increase its competitive advantage following the re-branding.

However, it is difficult to imagine a day when Yahoo! will be able to significantly close in on Google’s search business. For now, it needs to ensure that AOL does not catch up on sports, finance, and weather, while search should remain one of its long-term goals.

Performance and valuation

Yahoo!’s Q1 revenue fell 6.6% from last year, but earnings increased 36.3%. Google’s revenue, on the other hand, was up 31.2%, while earnings grew 15.8%. On the other hand, AOL’s revenue grew 1.7%, while earnings were up 22.7% year-over-year.

Yahoo!’s gross margins are the best among the three companies, standing at a massive 68%, compared to Google’s 58% and AOL’s 31%. However, its operating margin of 16% is dwarfed by Google’s 25%, while AOL’s stands at 14%.

In terms of valuation, Yahoo! currently trades at 7.34 times in price to earnings ratio, compared to Google’s 26.51 and AOL’s 3.09. Yahoo! and AOL seem to be cheaply priced compared to Google, but when we factor in the companies’ earnings growth rates, Google ends up being the cheapest with a price to earnings growth ratio of 1.27 times, compared to Yahoo!’s 1.33 and AOL’s 1.51.

The bottom line

Yahoo! seems to have a perfect mix of acquisitions, while the re-branding will help change the old picture. However, getting back to a position where it could possibly pose a threat to Google seems to be a tall order. Nonetheless, with the ex-Google executive at the helm, and having already regained investor confidence, everything is possible.

Mayer’s shopping spree, which includes 12 acquisitions in the last twelve months, seems to make sense as far as the future is concerned. The acquisitions will help the company in growing user engagement, which will translate into ad revenue if monetized effectively. Yahoo! may not get back to its former glory in the near-term, but we cannot rule that out completely.

The article A Few Reasons Why Yahoo! Is Getting Better originally appeared on Fool.com and is written by Nicholas Kitonyi.

Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Nicholas is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.