Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

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.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.