Facebook Inc (FB), Google Inc (GOOG): Yahoo! Inc. (YHOO)’s 3 Biggest Problems Keep Holding it Back

When I bought my first computer and got connected to the internet, Yahoo! Inc. (NASDAQ:YHOO) and AOL, Inc. (NYSE:AOL) were all the rage. At that time, people were just beginning to realize the potential of the internet, and Yahoo! Inc. (NASDAQ:YHOO) was the internet search engine of choice. As the years went by, Google Inc (NASDAQ:GOOG) came along, and is now the most popular search engine by far.

Facebook Inc (NASDAQ:FB)Now, when people need bits of information, they use the catch phrase “Google it”. Yahoo! is currently the third largest search engine site behind Google Inc (NASDAQ:GOOG) and Bing, which is owned by Microsoft Corporation (NASDAQ:MSFT). Even die hard Yahoo! has fallen, but it is still a relevant search engine site, and with the right catalysts, it could make up some of the ground that it has lost to Google.

Yahoo!’s fourth-quarter earnings confirmed that it is making progress. In the fourth quarter, Yahoo! Inc. (NASDAQ:YHOO) had revenue of $1.34 billion, compared to revenue of $1.32 billion in the fourth quarter of 2011. Net income was $272 million, compared to net income of $295 million a year ago, and its earnings per share came in at $0.23 compared to earnings per share of $0.24 a year ago.

The best news from the earnings report was that Yahoo!’s quarterly and annual revenues were both fractionally higher on a year over year basis. The revenue increase was Yahoo!’s first in four years. Another bit of good news was that its total search ad revenue improved 3.8%, and its per-ad revenue strengthened 7%.

In addition, its gross margin of 69% and its operating margin of 16.1% were both industry highs. The final bit of good news was that the company finished the quarter with $4.2 billion in cash. The bad news was that earnings from its core business display-ads fell 3.5%.

The drop in display advertising revenues was considered to be particularly bad news, because it decreased Yahoo!’s portion of the U.S. market to 9.3% from 11% in 2011, while its chief competitor Google Inc (NASDAQ:GOOG) increased its market share by 2% to 15%, and Facebook Inc (NASDAQ:FB)’s market share came in at 14%.

Yahoo! Inc. (NASDAQ:YHOO) not only lost advertising market share to Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB), it lags behind its two top competitors in the important area of revenue growth. For instance, Google Inc (NASDAQ:GOOG) grew year-over-year quarterly revenue at a rate of 6.7% versus Yahoo!, whose year-over-year rate of quarterly revenue growth was 1.6%.

Facebook Inc (NASDAQ:FB) increased its year-over-year quarterly revenue at a rate of 40.1 %. The fact that a company like Facebook Inc (NASDAQ:FB) can increase revenues at such a rapid pace indicates that the business display advertising market is still wide open. Perhaps, with time, Yahoo! will be able to grow advertising revenues at a rate that is similar to Facebook Inc (NASDAQ:FB).

Yahoo!’s change in direction

It is very striking that Yahoo! Inc. (NASDAQ:YHOO)’s fourth-quarter earnings were nearly identical to those from last year. The same is true for its annual earnings. Its annual revenue was $4.986 billion in 2012, compared to $4.984 billion in 2011. The annual earnings per share differed, but only because of a one-time transaction.