Marissa Mayer is a red herring. Despite all the fanfare she’s received in the last year, her status as CEO has largely been irrelevant to Yahoo! Inc. (NASDAQ:YHOO)’s 70% rally. Rather, the continued appreciation of Alibaba, and an aggressive buyback program, have accounted for nearly all of the stock’s gains.
Given Yahoo! Inc. (NASDAQ:YHOO)’s recent earnings results, the core business appears to be deteriorating. The stock may continue to hold up given the hope for Alibaba’s IPO, but once that’s over, investors would be wise to consider getting out.
Alibaba is the Amazon of China
Alibaba has been called the Amazon.com, Inc. (NASDAQ:AMZN) of China. Actually, it’s more than the Amazon.com, Inc. (NASDAQ:AMZN) of China, as it generates more revenue than Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) combined.
Luckily for Yahoo! Inc. (NASDAQ:YHOO) shareholders, the company was wise enough to invest in Alibaba years ago. That investment has done incredibly well. Alibaba could be worth $70 billion, and Yahoo! owns nearly a quarter of the company.
When Alibaba IPOs, it has the right to buy half of Yahoo! Inc. (NASDAQ:YHOO)’s stake, or force Yahoo! to sell it into the market. Either way, Yahoo! is poised to get a big chunk of money once Alibaba begins trading.
Yahoo!’s core business is deteriorating
But once Yahoo! has sold off its Alibaba stake, what’s left? Unfortunately, not much.
In its earnings report, the company revealed that ad prices had declined by 12% in the second quarter. At the same time, the company cut guidance for revenue this year.
Earlier this week, comScore said Yahoo! Inc. (NASDAQ:YHOO)’s search market share search had declined, now down to just 11.4% of the market.
Can Yahoo! be turned around with acquisitions?
Since Mayer took the role, she’s been using an acquisition strategy to try to turnaround the company. Most of these have been small buys, with the goal of bringing in top engineering talent.
But Yahoo! has made one major acquisition — Tumblr. Can Yahoo! Inc. (NASDAQ:YHOO) actually justify the $1.1 billion it paid for Tumblr? That remains to be seen.
Monetizing Tumblr seems far from an easy task. As Jim Edwards at Business Insider notes, from an advertising standpoint, Tumblr suffers from numerous problems. Namely, it doesn’t really know who its users are — making targeted ads all but impossible.
Are more acquisitions coming?
In the past, I’ve speculated that Yahoo! could be interested in acquiring other major (but smaller) Internet properties like Yelp Inc (NYSE:YELP) or OpenTable Inc (NASDAQ:OPEN).
Back in March, Kara Swisher reported that Yahoo! was interested in making two major acquisitions. Tumblr was obviously the first, but the second has yet to materialize. Yahoo! has been linked to DailyMotion and Hulu, but neither of these deals have gone through.