Should You Buy Yahoo! Inc. (YHOO)?

Now that Yahoo! Inc. (NASDAQ:YHOO) is very much in the limelight after acquiring Tumblr, it is obvious that many investors have a question: “Should I invest in Yahoo!?” So, let’s examine some parameters before drawing any conclusions.

Revenue from search

In 2012, the management structure of the company changed a lot, with the most prominent change being that Marissa Mayer was introduced to Yahoo! Inc. (NASDAQ:YHOO) as the new CEO. It has been very evident that Mayer has put in a lot of hard work since then. We have seen that she has been trying many things to boost Yahoo!’s market position.


Mayer tried to break-free from the search and advertising services and sales agreement (“search agreement”) with Microsoft Corporation (NASDAQ:MSFT), according to which Microsoft is the exclusive algorithmic and paid-search service provider for Yahoo! Inc. (NASDAQ:YHOO).

However, to date, there has been a gap in revenue per search (RPS) between pre-transition and post-transition periods, and Microsoft Corporation (NASDAQ:MSFT) has been making payments under the RPS guarantee to compensate for the difference. So there is a clear decline in search revenue.

On April 30, Microsoft extended the RPS guarantee for another 12 months commencing April 1. After one year, if Microsoft fails to deliver on RPS, Yahoo! Inc. (NASDAQ:YHOO) potentially could abandon the 10-year deal. Yahoo! has been in talks with Google Inc (NASDAQ:GOOG) to provide Yahoo! with a search-ad partnership.

Google Inc (NASDAQ:GOOG) has been the best player when it comes to search and advertisement. Mayer’s experience at Google for more than 13 years before joining Yahoo! Inc. (NASDAQ:YHOO) will be very useful for Yahoo! in improving its search market share.

Microsoft is in full-force to improve its search. Microsoft is planning to integrate search with all of its products. Microsoft believes typing in a search box will not be the search model in the years to come. The company is coming up with a Siri-like model for complete digital assistance.

What if Yahoo! and Microsoft’s deal continues??

Yahoo!’s search revenue increased by 6% in 2013 Q1 as compared to 2012 Q1. If Microsoft is able to be successful, then Yahoo! may consider holding the deal. Another reason is that in 2008, Yahoo! did try to sign the deal with Google, but Justice Department antitrust officials didn’t approve that. If Yahoo! faces the same resistance again, then it is very likely that it will not be ending the search-ad deal. This means that Google will be losing out on a very big deal.

The Yahoo-Microsoft tie-up will also affect Google’s search market share. In the last quarter, Google’s market share dropped to 69.2% from 69.7% whereas Bing’s search market share rose to 26.1% from 25.9%. Even though the difference is not significant today, in the future Microsoft’s attempt to make search more intuitive can turn the tables.

What if Yahoo!-Google teams up?

Yahoo! is making many attempts to get a deal done with Google. A deal can bring Yahoo! hundreds of millions of dollars in profit, and a deal would bring a lot of money to Google, too. Its search market share will also increase. The Yahoo!-Google duo could hit Microsoft badly, and Microsoft’s market share could fall further. Microsoft needs Yahoo! more than Google.

Until the time comes when Mayer can choose between Microsoft and Google, an attempt is being made by Yahoo! to improve the user experience for search by changing the look and feel of it. However, that might not be a powerful weapon to increase Yahoo!’s market share significantly.

Income from investments

Yahoo! has a good investment profile, which includes government, agency and corporate-debt securities, time deposits with financial institutions, money market funds and preference shares of the Alibaba Group. Fixed rate and fixed income securities can adversely affect its fair value if interest rates fall or if credit quality of the issuer deteriorates. However, Yahoo! has no current requirement or plan to sell securities in an unrealized-loss position.

Yahoo! paid $1 billion for a 40% stake in Alibaba in 2005, and is now reaping a huge return of $7.6 billion. Approximately $6.3 billion was received in cash and the remainder as preferential shares.

In 2012 Q4, the total fair value of the Alibaba Group Preference Share was $822 million, whereas in 2013 Q1 the fair value was $831 million. Alibaba Group, a private Chinese company, has blown past companies like Facebook Inc (NASDAQ:FB) in terms of revenue and net income. Its growth in 2012 was incredible and promising. This is grabbing attention of many investors and analysts alike who are counting on the rising value of Alibaba Group.

Tumblr acquisition

Yahoo! is expecting Tumblr to boost revenue by 2014. Yahoo! acquired Tumblr, a popular blogging and social-media network, for $1.1 billion. Tumblr’s 2012 revenue was only $13 million. Yahoo! overpaid for the deal, which might not be favorable from an ROI perspective. However, Yahoo! is expecting Tumblr to add its “cool” effect to the company.

Yahoo! has agreed upon the complete independence of Tumblr. Tumblr’s 26-year old CEO, David Karp, announced on the Tumblr website:  “Our headquarters isn’t moving. Our team isn’t changing. Our roadmap isn’t changing. And our mission – to empower creators to make their best work and get it in front of the audience they deserve – certainly isn’t changing.”


Considering the fundamentals, both quantitative and qualitative, it seems it’s a good time to invest in Yahoo!. Additionally, since Marissa Mayer has taken up the role of CEO, many attempts have been observed going in a positive direction for the growth of the company. There has been linear growth since then, which indicates that Yahoo!’s market share is going to increase.

Yahoo!’s search is still a problem. But Yahoo!’s changes will definitely attract users. If by 2014 Microsoft is not able to live up to the RPS guarantee, then Yahoo! might consider opting for Google instead.

The article Should You Invest in Yahoo!? originally appeared on and is written by Riddhi Shah.

Riddhi 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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