Can Yahoo! Inc. (YHOO) or Microsoft Corporation (MSFT) Leverage Social Media to De-Throne Google Inc (GOOG)?

Yahoo! Inc. (NASDAQ:YHOO) and Microsoft Corporation (NASDAQ:MSFT) are constantly playing catch-up with Google Inc (NASDAQ:GOOG) in the search for more ad revenue, but the two underdogs may have found an opportunity to expand their reach through the use of social networking.

Yahoo! Inc. (NASDAQ:YHOO)

Don’t drop the ball, Yahoo!

Yahoo!’s acquisition of Tumblr has been framed by the media as the worst idea since Geocities, because of Yahoo!’s apparently uncool nature and “black thumb” when it comes to new projects.

Some are worried that Yahoo! Inc. (NASDAQ:YHOO) will hurt its brand image by providing ad services to a website with controversial pictures and subjects. To that, I say: the company could stand to spice up its image. Since the bleak Yahoo.com (NASDAQ:YHOO) interface isn’t going away any time soon, this is their best shot.

But the acquisition of the one-off social media site for $1.1 billion has its benefits, and may help Yahoo! to become a stronger competitor against Google. The price tag wasn’t a problem- Yahoo! still has over $4 billion in cash after the purchase.

Tumblr is expected to bring in $1.1 million in ad revenue for 2013, marking the first year the company will turn a profit. There’s more room for ad revenue, but Yahoo! will have to tread lightly when it comes to infringing on blog space.

One idea that Yahoo! Inc. (NASDAQ:YHOO) should consider is the idea of sharing ad revenue with Tumblr bloggers. The opportunity to make money from blogging could provide a turn-key experience for users, something that could explode in popularity like Google Adwords did for bloggers in the past.

While this won’t dethrone Google just yet, Yahoo! may have a lot of promise in profiting from the acquisition. Yahoo! has a 24.1% return on assets (RoA), almost twice the 12.62% RoA of Google. There’s a lot of ground to cover, but Yahoo! may not be the managerial train wreck that the media has framed it to be. Plus, Yahoo! Inc. (NASDAQ:YHOO) trades at only 8 times its earnings- giving it a lot of room for error compared to Google- trading at a P/E OF 25.5.

Bing’s aggressive approach

Microsoft Corporation (NASDAQ:MSFT)’s Bing project continues to bite at the ankles of Google, but until lately, it didn’t seem to be making progress. The company has poured $10 billion into the search engine, and has made great efforts to smear Google in its “scroogled” advertising campaign, among others.

Even so, Google is still the initiator for 5 times the amount of domestic searches that Bing is. And when it comes to global searches, Bing doesn’t come nearly as close. Analyzing the ad revenue and hits per company, it appears that Microsoft is about half as effective in profiting from search ad revenue as Google.

Graph Search is Bing’s last hope

The only real hope for Microsoft Corporation (NASDAQ:MSFT) to stay relevant in online advertising is through Facebook (NASDAQ:FB). The two companies are currently working together to integrate search and Facebook interface. Currently, Facebook accounts for only .13% of Bing’s ad clicks. For good reason too; the current Bing integration is an afterthought, and isn’t readily available by users unless they search for it.

But with Facebook Inc (NASDAQ:FB)‘s new feature “Graph Search” being unveiled, Bing may be able to monetize searches in Facebook more effectively, and add a large amount of relevance to their online advertising efforts.

Graph Search itself is an interesting concept that allows users to search the Internet and Facebook that crawls data from their friends on the website. It allows people to search for things that are tailored to their lifestyle. It shows more promise than Google Plus, and may become effective in drawing ad revenue if Facebook can integrate it well enough.

Still though, the extent of their results is hard to gauge going forward. Microsoft’s return on assets is a low 13.5%, on par with Google’s current returns. And while we can’t assume this number holds true for their Bing operations alone, it gives us an idea of about how effective Microsoft Corporation (NASDAQ:MSFT) will be in their efforts to profit from online advertising projects.  Additionally, Microsoft has a P/E valuation of 18, which places it in 81st percentile of the technology sector by earnings valuation. The company is cheaper than Google, but doesn’t compare to Yahoo!’s rock bottom valuation of 8 times earnings.

Google is still king

Even with these prospects, realize that Google still brought in $12 billion in ad revenue for 2012 and has a plethora of new projects in its pipeline for the future. The company doesn’t come cheap however, trading at over 25 times their earnings. So even though Google has promise, Yahoo! or Microsoft may prove to be better value investments.

Google still remains king when it comes to advertising, but Google hasn’t shown much success in the integration of social media into its ad revenue. If either Yahoo! Inc. (NASDAQ:YHOO) or Microsoft Corporation (NASDAQ:MSFT) can capitalize on this medium, then they could gain much more leverage with their search engines in the future, resulting in more popularity and more profits.

There are three very distinct levels of uncertainty for these companies, but I would personally choose Yahoo! given its extremely low P/E and my renewed faith the company’s attempts to stay relevant.

The article Can Yahoo! or Microsoft Leverage Social Media to De-Throne Google? originally appeared on Fool.com and is written by Ryan Gilbert.

Ryan 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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