Yahoo’s Cost Cutting Initiatives Can Lift Profit Margins, Stock Value

Yahoo (NASDAQ:YHOO) competes primarily with Google (NASDAQ:GOOG) and AOL (NYSE:AOL) in the search market and partners with Microsoft (NASDAQ:MSFT) which operates the Bing search engine.  We currently have aTrefis price estimate of $18.53 for Yahoo’s stock, about 13% above market price.

Yahoo recently announced its plan to cut about 650 of its 14,100 workforce. ^[1] The company plans to cut jobs at Yahoo’s products group related to Yahoo web properties like its news, sports and e-mail services. Yahoo also reportedly plans to shut down several under-performing sites, which could help Yahoo reduce operating expenses. ^[2]

Display Advertising Remains the Most Valuable Business for Yahoo

The jobs cuts and shut down of its under-performing websites will help improve the operating margins of Yahoo’s display advertising business. We estimate that display advertising generates about 22% of our $18.53 price estimate for Yahoo stock, making this segment the most valuable business for Yahoo. Operating margins for this segment have declined from around 30% in 2006 to around 27% in 2010. However, we do expect some recovery in profit margins during 2011 stemming from a revival of the advertising market, provoking increased monetization of ad space (higher revenue per 1,000 page views, or RPM).

[trefis_forecast ticker=”YHOO” driver=”0118″]

Yahoo’s Cost Cutting Efforts Could Lift Profit Margins

This is not the first time in recent years that Yahoo has trimmed its workforce. The company cut around 700 workers during the second-quarter of 2009, or about 5% of its work force at that time. And it cut about 1,400 employees in December 2008. ^[1] Yahoo reportedly plans to shut down under-performing sites such as search engine AltaVista, online news aggregator Buzz and a social network site MyBlogLog, and could be looking to sell social bookmarking site Delicious. ^[3]

If Yahoo continues to emphasize improvement in operational efficiency, its margins could climb higher beyond 2011 (vs. our current forecast of flat beyond 2011) and push our price estimate above its current level at $18.53, which is already about 13% ahead of market price. For example, if Yahoo can improve its operating margin in the display advertising business by 1% each year beyond 2011, ultimately reaching 37% by the end of our forecast period, it could generate an additional 5% upside to our estimate for Yahoo stock.

Drag the trend-line in the chart above to see the impact of various display advertising EBITDA margin scenarios on Yahoo’s stock value.

You can see the complete $18.53 Trefis Price estimate for Yahoo stock here.

1. Yahoo job cut report, Wall Street Journal, December 2010 [↩] [↩]
2. Yahoo plans to shut down websites, Wall Street Journal, December 2010 [↩]
3. Delicious blog, December, 2010 [↩]