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What Should You Do With This Online Giant?

Wednesday - 5/8/2013, 3:39pm  ET

Yahoo! has been under close watch by investors. The company brought on a new CEO and is focused on growing profitability. With recent earnings and new strategies, what should investors think of Yahoo?

Earnings report

Yahoo! recently reported its quarterly earnings, and results were mixed. On the positive side, earnings per share were $0.35, which was almost 50% higher than analysts expected.

Revenue was flat, though. Total revenue after what Yahoo! pays other websites for carrying ads was $1 billion--this was just below than Wall Street expectations of $1.1 billion.

Yahoo! makes the majority of its revenue in two different segments: advertising displays and search. In the most recent quarter, advertising revenue fell by 11%, while search revenue grew by 6%.

The stock price dipped on this news, but has increased by nearly 50% in the last nine months. Yahoo!’s CEO, Marissa Mayer, has initiated new offerings in its email platform to integrate with Google and Apple mobile-operating systems. This has caused the user base to grow by 50% quarter-over-quarter.

Yahoo!’s earnings were boosted by its holdings in Alibaba, a Chinese marketplace website. Still, 40% of total earnings come from ad revenue, which have been declining.

Competition

Online-ad revenue is important to more companies than just Yahoo!. Two other companies that rely heavily on ad revenue are Google and Facebook .

Facebook reported advertising revenue of $1.3 billion in its fourth quarter. Advertising comprises 84% of its total revenue. While Yahoo! hasn’t been growing its ad revenue, Facebook has and delivered an increase of more than 40% in the last year. The company also focuses on mobile platforms, and mobile advertisements make up roughly 21% of revenue.

The company has been faced with growing operating costs, though. It will have to grow its revenue at a higher rate this year to offset rising expenses. Operating expenses are already 74% of revenue, up from just 63% the same time last year. 

Facebook has been developing a new way for businesses to track conversions with advertisements. Having this easy-to-use platform could bring more advertisers to Facebook. 

Total mobile advertising spend will reach $12 billion this year. More companies are choosing mobile advertising, so it's up to Internet companies to offer strong incentives; Facebook's advertising tracking is a good start for the company. 

Google has a much stronger revenue growth rate than Yahoo!. It has grown its top line by 36% in the last year. Google is Yahoo!’s major competitor for online searches and subsequent ad revenue; 96% of all revenue come from advertisements, with the majority coming from Google websites.

Companies choosing to pay for online advertisements have multiple options. Google has the strongest search size, but has seen a decline in sales revenue in the last year as well.

Google Adwords is one of the most popular online advertising channels, representing two-thirds of the total market. However, it hasn't been able to translate this success to mobile advertising. And Facebook toppled Google this year for mobile ads.

Mobile advertising represented 11% of total digital-advertising spending as of data in 2012. This year it is likely to reach 16% or more of all digital advertising. It is imperative that Google increase its efforts in mobile applications. As businesses elect mobile advertising over standard digital advertising, it could take away from Google's total revenue. 

Both Google and Facebook will have to fight Twitter and Pandora for mobile advertising, as well. Both of these companies offer specific advertising options for companies. 

Final thoughts

There are difficulties in store for advertising revenue at Yahoo!. There is stiff competition in the online advertising world, and Yahoo! hasn’t been able to capture more market share.  That said, investors should see keep looking at Yahoo! because the stock is reasonably priced.  For instance, its price-to-earnings is only 6.8. Google and Facebook, on the other hand, have price- to-earnings ratios of 24.4 and 1,714, respectively.

The road ahead will be challenging for Yahoo!. The safer bet for online advertising is Google and Facebook, though Yahoo! is priced at a very conservative level. If the CEO Marissa Mayer can continue to steer Yahoo! to higher profits while growing all of its divisions, investors may want to consider this stock in the future. But right now, the company does not fit the bill for conservative investors. 

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