The past several years have been tough for Yahoo! Inc. (NASDAQ:YHOO) shareholders. The company that once flew sky-high during the tech bubble has seen its stock price and underlying business struggle to keep up in an ever-evolving internet landscape.
Recent developments, including the much-hyped purchase of media network site Tumblr, have led to renewed optimism surrounding Yahoo! Inc. (NASDAQ:YHOO)’s future potential.
Does the deal represent the catalyst Yahoo! Inc. (NASDAQ:YHOO) investors have been waiting for? Or would investors do well to steer clear of Yahoo! Inc. (NASDAQ:YHOO) entirely?
Much ado about something?
In the high-profile deal, Yahoo! Inc. (NASDAQ:YHOO) recently announced it would acquire Tumblr for $1.1 billion in a mostly cash deal. Through the acquisition, Yahoo! is eagerly absorbing Tumblr’s 50 billion blog posts and hopes it can broaden the reach of its business.
Yahoo! Inc. (NASDAQ:YHOO)’s long-suffering shareholders, who have seen their stock trade steadily downward since breaching $40 per share in 2006, are likely hoping this deal will propel the company into the future. Whether that’s true remains to be seen, but for the time being, Yahoo! does have some lucrative assets, including Yahoo! Finance, Yahoo! Sports, and its investment in Alibaba.
To that end, Alibaba reported fourth-quarter net profit skyrocketed 171%. Much has been made of how Yahoo! might monetize its 24% stake in Alibaba, with an IPO of the Chinese online shopping giant a likely scenario. Recent estimates have placed Alibaba’s worth in the $100 billion range.
For the time being, even with the financial windfall provided by Alibaba, Yahoo! is still struggling, largely due to the continued underperformance of its Search business. In total, Yahoo! saw GAAP revenue decline 7% in the first quarter year over year and reported flat adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company’s Search business in particular saw revenue decline 10% during the first quarter as compared to the first quarter of last year.
Going back further, Yahoo!’s financial struggles are plain to see. The company’s revenue stagnated in 2012, flat from the prior year, and remain significantly below pre-recession levels.
Better tech alternatives to choose from
Technology stocks have seen a transformation in recent years, with many companies embracing the idea of paying competitive dividends to shareholders. Yahoo! has resisted this, focusing instead on growing its business through acquisitions like the Tumblr deal. Investors are hungry for yield in today’s uncertain economic climate, but they aren’t getting any income from holding Yahoo! shares.
Other stocks within the technology sector can offer more to investors looking to receive income from their stocks. For example, software king Microsoft Corporation (NASDAQ:MSFT) provides a compelling 2.6% dividend yield at recent prices, which compares favorably to the 2% yield available on the S&P 500. Moreover, Microsoft Corporation (NASDAQ:MSFT) is performing better than Yahoo!. Last year, Microsoft booked adjusted diluted earnings per share of $2.73, along with 5% revenue growth.
If income isn’t a requirement for your tech holdings, there still seem to be better alternatives available than Yahoo!. For example, Chinese company Baidu.com, Inc. (NASDAQ:BIDU) and Yahoo! have a similarity in that they are both heavily involved in search. Baidu.com, Inc. (NASDAQ:BIDU) is sometimes referred to as the Google of China, because it is the main search engine there.
Most importantly, Baidu is reporting high growth. Baidu recently reported its fiscal-first quarter earnings, and revealed that revenue had grown 40% from the same period one year ago. Baidu operates its namesake search engine in China, where it has the playing field all to itself. That means that a country of one billion people with a rapidly developing middle class is ripe for Baidu’s picking.
The Foolish bottom line
Yahoo!’s acquisition of Tumblr is certainly an exciting development, but whether the deal will prove beneficial to shareholders is another matter entirely. Technology firms have a long history of over-paying for promising acquisitions that don’t pan out, and Yahoo! is no exception (consider its acquisition of Flickr). Only time will tell if Yahoo!’s shareholders are better off from the deal.
As it stands today, it seems that investors have better technology companies to choose from than Yahoo!. Income investors would be better served considering Microsoft, while growth investors will find much more to like with Baidu’s recent operating results.
The article Is the Tumblr Deal Enough to Turn Yahoo! Around? originally appeared on Fool.com.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu and Microsoft. Robert 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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