Yahoo! Inc. (NASDAQ:YHOO) is an Internet company focused on providing comprehensive web content on a diverse set of subjects, against which it shows display advertisements to generate revenues. The company owns various popular properties such as Yahoo! Mail, Yahoo! Sports and Yahoo! Finance, and had approximately 670 million monthly unique visitors worldwide in 2011. Overall, Yahoo! is, both globally and in the U.S., the fourth ranked website in terms of traffic and is used by approximately 20% of the worlds internet users on a daily basis. 
Majority of Value in Non-Operating Segments
According to our estimates, over 40% of Yahoo!’s value consists of non-operating segments, which constitute of the company’s stake in Alibaba and Yahoo! JAPAN. Therefore, one could argue that over the longer term much of Yahoo!’s value is determined by factors that Yahoo!’s new CEO, Marissa Mayer, can’t directly influence.
However, we expect the non-operating stakes to decrease over time. Yahoo! will exit Alibaba after the Alibaba IPO, and the company is working towards exiting its stake in Yahoo! JAPAN. We expect the company to return cash from the sales to shareholders, which will make the firm’s operating segments a bigger portion of the firm’s value. If this materializes and cash becomes a small percentage of total assets, the company’s display ad segment will make up for more than 50% of the firm’s value.
Display Advertisements Are Biggest Operating Segment
According to our estimates, Yahoo!’s display advertising segment is its biggest operating segment, making up for around 15% of the company’s total value. It generated revenues per page view (RPM) of only around $1.50 per 1000 views in 2011, even as ailing competitors such as AOL (NASDAQ:AOL) generated around $3 per 1000 page views. We expect this figure to stay flat for Yahoo! over the next 3-5 years, but do think that opportunities exist for Yahoo! to drive growth.
For example, one of the key places that Mayer can drive growth is by increasing the amount of data that the company has on its users. She has already stated her plans on focusing on personalization of a user’s experience on Yahoo!, and we think that this can help raise the data quality that Yahoo! has on its users. This will consequently increase the quality of target ads across Yahoo! properties, and should increase RPM over the long term.
Search Advertising in Decline
While display advertisements constitute the majority of the company’s operating value, search advertising also contributes to around 10% of total value and around 35% of value if non-operating segments are removed. This segment of Yahoo! has been in decline over the past three years as its revenues fell from $2 billion in 2008 to $1.5 billion in 2011. To combat this, the company entered an agreement with Microsoft’s (NASDAQ:MSFT) Bing, which has seen limited success as revenue per search has continued to decline over the past year.
Overall, we think that one of the key segment is Yahoo!’s mobile strategy. The search market is saturated for existing users, but we think that an opportunity exists for Yahoo!, if it can attract new internet users to its sites via the mobile platform. Since mobile is going to be a key source of overall industry search revenues going forward (mobile search is expected to be bigger than PC search for Google), Yahoo! must invest in mobile applications which engage users and should also consider the possibility of releasing its own mobile OS.
Is There Upside Value In Yahoo!?
At present, Yahoo!’s market price is approximately the same as our price estimate. The stock ran up of around 33% since early September, leading it to converge with our price estimate. Overall, we think that the company’s future is uncertain as the possibility of one successful or failed product can influence the company’s value drastically in the eyes of investors.
This, combined with the lack of upside when comparing the market price to our price estimate, leaves an investor more exposed to negative developments in the business when compared to buying the stock below our estimate of intrinsic value.
However, if under Mayer’s leadership, Yahoo! is able to improve its mobile and social product offerings, it could see an improvement in its display and search businesses, which could support the case for upside to the stock.