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Investment Overview for Yahoo (NASDAQ:YHOO)
Below are key drivers of Yahoo's value that present opportunities for upside or downside to the current Trefis price estimate for Yahoo:
- Internet Users on Yahoo: By our estimates, internet users on Yahoo has increased from roughly 594 million in 2009 to over 800 million in 2013, and we expect it to increase further till the end of Trefis forecast period. With mobile device penetration expected to increase, Yahoo has taken initiatives to tap into this growing market. It has partnered with Apple,Samsung and Nokia to integrate its content on their phones. Moreover, Yahoo has also developed mobile apps for iPhone and Android-based smartphones. Unique visitor base across mobile devices is expected to rise as internet penetration increases globally. For Yahoo to capture a material share of this growing market, it has accelerated its development efforts, which includes more engaging apps and effective ways to distribute its extensive array of digital content, for smartphone and tablet. If Yahoo can increase its unique visitor base to 1.2 billion by the end of Trefis forecast period, there could be an upside of 5% to the Trefis price estimate.
- Revenue per page view from Display Ads: We currently forecast Yahoo's RPM rate to remain at around $1.11 per 1,000 page view by the end of Trefis Forecast Period. RPM will remain flat as Yahoo continues to push for mobile platform, which generally brings in lower dollar ad revenues. Moreover, recent tie up with Google will aid in arresting the decline in RPM by increasing the number of relevant ads across Yahoo properties. However, if Yahoo consistently loses ground to other online advertising sites such as Google and Facebook, and its RPM declines to $0.50 by the end of the Trefis forecast period, there could be a 10% downside to Trefis price estimate.
- Yahoo's Search Market Share: Yahoo's global search market share has consistently declined over the last few years from around 7.2% in 2009 to around 5.4% in 2013, and we expect it to decline further going forward. Yahoo has lost share to Google and continues to do so. However,Yahoo's tie up with Microsoft to power searches across its properties through Bing's search algorithm has produced minor improvements as the number of searches across Yahoo properties have been stable in 2013. Due to the tie up with Microsoft; Yahoo's search traffic acquisition cost is down nearly 80%. If Yahoo's market share were to improve to 10% by the end of the Trefis forecast period, Trefis price estimate could increase by 10%.
- Revenue per Search: We currently forecast Yahoo's RPS to decline from an estimated $11.18 per 1,000 searches in 2013 to around $10.79 per 1,000 searches by the end of Trefis forecast period. Google's RPS has always been higher than Yahoo. If Yahoo could improve its RPS to around $15 per 1,000 searches by the end of Trefis forecast period, there could be a 10% upside to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Yahoo at the top of the page.
Yahoo offers comprehensive web content related to various verticals such as sports, finance etc, against which it displays relevant advertisements. Some well-known Yahoo content websites are Yahoo News, Yahoo Finance, Yahoo Sports, and Yahoo Answers. Additionally, advertisements are shown on Yahoo Mail too.
Display advertisements are placed on Yahoo properties in various formats such as rich media format that includes video and audio ads or as static and/or animated images. The ads are priced based on cost per thousand impressions (CPM) i.e the number of times the display ad shows up at Yahoo properties.
Yahoo.com offers a dedicated platform to conduct searches on the Internet through PCs and wireless devices.
Yahoo makes money from contextual advertising known as keyword advertising in which the search result matches the search word a user inputs. For example, a user searching for "NYC restaurants" would be shown a variety of ads on the right-hand side of Yahoo's search results pertaining to restaurants and food services in New York City.
Advertisers on Yahoo bid for keywords (such as "restaurant", "NYC") to display their advertisements. The pricing of keywords, the inventory of keywords available, and the frequency of user search impact how much money Yahoo makes on search.
We believe that Yahoo's Search Advertising segment and Display Advertising segment together form the core of its business and are equally valuable for its future revenue growth.
High Number of Internet users on Yahoo
Despite struggling to keep users engaged, Yahoo still manages to get significant web traffic to its sites. According to comScore in January 2014, Yahoo was still the third-largest web property in U.S., clocking in around 164 million monthly unique visitors. On a global scale, Yahoo has an estimated 800 million monthly unique visitors for 2013, which is expected to increase further as internet penetration increases globally.
We estimate the Number of internet users on Yahoo properties will increase from around 700 million in 2013 to over 887 million by the end of Trefis forecast period.
Search queries on the rise
As more people gain access to the Internet, number of search on the internet is increasing. We estimate that the number of internet users will go up from 2.69 billion in 2013 to over 3.4 billion by 2020. Even though, market share for Yahoo properties may shrink, we expect the number of searches on Yahoo properties to increase due to overall increase in the number of internet users and the searches they query on the Internet. Moreover, Yahoo is improving its content and user experience across its properties which will result in slower decline in market share.
Strategic Investments (Alibaba and Yahoo Japan)
Yahoo has a 35% stake in Yahoo Japan, which at the current price is valued at approximately $5.8 billion after-tax. Yahoo also has a 24% stake in the Alibaba Group (it sold half of its stake in mid-2012), which owns such properties such as Alibaba.com, TaoBao (similar to eBay) and AliPay (similar to PayPal). These strategic investments together contribute almost half of Yahoo's overall value. Yahoo is expected to sell some of its stake in Alibaba during its IPO. It can either choose to return the money to shareholders or invest it in some of its expansion plans.
Marissa Mayer's leadership
Marissa Mayer was appointed as Yahoo's CEO in July 2012. Her goal with the organization is to foster an innovative environment which develops engineering talent. She hopes to change Yahoo's culture that will stimulate new product growth, and attract new users.
Under her leadership, the company is focusing on personalization of Yahoo's products and increasing company's presence on the mobile platform, as these will be key in attracting new users and driving RPM (revenue per 1000 page-views) growth.
Focus on mobile under Mayer
Since taking over the position of Yahoo's CEO, Marissa Mayer has released numerous mobile redesigns. The first was a redesign of its still popular email service (which has now been optimized for mobile) and its photo-sharing property, Flickr. These two redesigns show that Mayer intends to strategically position Yahoo as a mobile player, and views this as the key to the company's turnaround going forward.
Microsoft-Yahoo search partnership
In December 2009, Yahoo and Microsoft entered into a search partnership in which Microsoft became the primary search provider on Yahoo properties. Under this agreement, Yahoo will get 88% of revenue generated from searches which use Microsoft's services. However, Yahoo has licensed its search technology to Microsoft for 10-years, which Microsoft can use to improve its existing search platforms.
Overall, this search deal has benefited Yahoo because it has received an RPS guarantee from Microsoft until March 2014. However, we will have to wait and see what Yahoo's RPS metrics will be once the guarantee from Microsoft expires. If RPS falls drastically, we think that Marissa Mayer could consider starting a new search engine, possibly by partnering with social networking giant Facebook.
Yahoo has not yet capitalized on mega-trends
While acting as a content aggregator was relevant for Yahoo about 10 years back, providing generalized content is not the norm today, with most successful websites providing niche/specialized content.
Unfortunately, Yahoo has not been able to capitalize on new web-trends in the past , namely social, local and mobile. While Facebook has 1+ billion users on its network and Google's Android reaching 80% in the global smartphone OS market at the end of 2013, Yahoo has to build its website through new product development. However it faces an increased threat to both its search and display advertising businesses because users are increasingly using mobile devices to surf the internet. Therefore, it is important to monitor Yahoo's mobile strategy and product releases over the coming years.
Shutting down under-performing sites
Yahoo has shut down a number of under-performing and non core sites in the last few years. This includes social bookmarking service Delicious, search engine AltaVista, online news aggregator Buzz, and social network MyBlogLog to name a few. Most recently, Yahoo has closed its South Korean office as it was eroding Yahoo's search division profitability.
Yahoo is not the only company to have shown this trend. AOL has also done the same. In 2010, AOL sold a few business divisions like Bebo and ICQ. The company also reduced its operations in a few European countries, particularly France and Germany. These countries were unprofitable for AOL, and hence it decided to reduce or completely shut down operations there. Recently, it has exited from the non-profitable local hyper search business Patch.com
Search market in consolidation stage
Yahoo and Microsoft announced their search alliance in July 2009. AOL and Google also opted for a similar search partnership. In a market where winner takes all, consolidation is the name of the game. This strategy lets bigger player further strengthen their presence while smaller players gain from technical prowess of big search engines and lower cost related to search engine technology, thereby increasing profitability. Currently, Yahoo and AOL are small fish compared to Google and Microsoft in Search Ads market.
Trefis Forecast Rationale for Yahoo's Search Market Share
This represents the percentage of all global searches conducted on Yahoo.
Yahoo's market share has been on a gradual decline since the last few years, primarily due to Google's dominance in web search. Yahoo's market share decreased from nearly 7.2% in 2009 to roughly 5.4% in 2013. We expect Yahoo's market share to decline further by the end of the Trefis forecast period.
Trefis considered the following factors for its forecast:
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- Inferior brand in search relative to Google
- Over the years, Yahoo has consistently lost credibility as a search engine to rival and market leader Google, which has consistently maintained its top-spot as the biggest web-brand today.
- Lagging algorithms
- Although improving, Yahoo's search algorithms for both paid and organic listings are still arguably less sophisticated than Google's algorithm. Unlike Yahoo, Google's search algorithm has kept pace with relevant algorithm updates.
- Yahoo's partnership with Microsoft not gaining any significant results
- Yahoo's partnership with Microsoft, in which Microsoft Bing's search algorithm will power searches that happen on Yahoo, has not led to the turn-around that Yahoo expected to achieve.
- In 2013, Yahoo's market share has declined from 12.2% in Jan 2013 to Dec 2013.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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