Yahoo In 2014

Yahoo!’s ( NASDAQ:YHOO) stock underperformed the markets for most of the year. However, it shot up sharply in the last quarter of 2014, post Alibaba’s listing on the U.S. stock exchange. The stock is up by more than 26% for the year, while the return on NASDAQ composite index is close to 16%. Despite the excess return, Yahoo’s core business has failed to enthuse investors. Its CEO, Marissa Mayer, is under the scanner to deliver results, and her strategies have not shown much traction in the recent quarters. As Yahoo offers both content (video and premier magazine) and ads, we review Yahoo’s performance during the year and opportunities for it in the near foreseeable future.

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Focus On Collating Technology Into New product

Over the years, Yahoo’s product development had taken a back seat. However, 2014 was a year in which the company launched new digital magazines such as Yahoo Food and Yahoo Tech that curate content, videos and photos from Flickr and across the web. Additionally, the company acquired Aviate to further strengthen its mobile platform. ^[1] Over the past few quarters, the company has integrated technologies from the acquired companies within its products. For example, in June  the company launched the full scale version of Aviate, the Android app that caters to home screen launch. ^[2] Also, the company has incorporated Tumblr’s advertising technology into its digital magazines. ^[3] Furthermore, the company launched Yahoo News Digest based on the summarization technology of Summly, and acquired Aviate to further strengthen its mobile platform. ^[1] We believe the company is trying to boost user engagement, increase unique user count, and monetize its content more effectively through these efforts. To some extent it has been successful with this strategy, as it had more than 800 million unique visitors across its properties in 2014,  of whom more than 550 million were mobile unique visitors. However, the increase in the unique user count has not yet translated into revenue growth, and the company continues to strive fora better monetization rate through video content and acquisitions in ad tech space.

Online Video Content For Future Revenue

The company intensified its efforts to create  original online video content to leverage the fragmented TV landscape as consumer habits have changed and new online distribution models have emerged. The company is all set to launch its shows, Other Space and Sin City Saints, in 2015. These shows will run in conjunction to older episodes of SNL that are available on Yahoo Screen.

Yahoo is trying to attract more producers for its video content platform by offering better revenue split. It has also extended the ability to embed videos on other sites across the web, and host clips on all of its other web properties such as Yahoo.com, Tumblr and Yahoo! Finance. According to our estimates, YouTube made around $3.7 billion in net revenues in 2013, and will rake in around $4.7 billion this year. If Yahoo’s planned service can even make 10% of this estimated value, its top line can increase by $500 million. However, since Yahoo has lower take in the revenue split, chances of price war loom large, which might erode the earnings potential for both the companies.

Focus on Ad Tech

Since Marissa Mayer took over the company in 2012, the company has been focusing on improving user experience and increasing user count. However, it has paid very little attention to the needs of the marketers that advertise across its properties. As a result, the company has failed to monetize its properties effectively. This is reflected in company’s results, which have remained flat over the past few quarters.

According to eMarketer, mobile advertising in the U.S. will total $17.73 billion in 2014, with mobile search spending accounting for more than half of that total, or $9.02 billion. ^[4] By 2019, Forester estimates that mobile ad spending will reach $40 billion. ^[5]. In order to capitalize on this trend, Yahoo launched the unified ad market place for mobile search and native display advertising in February this year. ^[6] The seamless integration of mobile search with native display ads, which look and act just like the other stories on the page but are marked as ads, not only enhances user experience but can also boost revenue per pageview, as higher engagement leads to increases in pageviews.

While TV ad spending is expected to exceed $78 billion by 2018, video online ad spending is expected to exceed $12.71 billion by 2018, according to eMarketer. ^[7] Additionally, digital video ad spend is increasing at a faster pace and much of this growth is coming from mobile devices. eMarketer estimates that online video ad spending will increase to $5.96 billion in 2014. Most of this video ad spending will be from desktop-based ads— totaling $4.52 billion in 2014 (or 75.8% of digital video ad spending), vs. $1.44 billion for video ad spending on tablets and smartphones. By 2018, these figures will converge, when online will still slightly outspend mobile video ($6.64 billion to $6.07 billion). ^[7]

To take advantage of the rise in popularity of mobile and video ads, the company acquired two programmatic ads companies in the both the space. While Bright roll (which provides RTB platform for video ads) was acquired in November, Flurry (which specifically targets mobile ads through its programmatic platform) was acquired in July. These forays can significantly boost Yahoo’s display (video) and mobile ad revenues  and resurrect its faltering online ads business.

Yahoo’s Investments Continue To Boost Valuation

While Alibaba and Yahoo! Japan have added immense value to Yahoo’s stock holders, Tumblr, which was acquired in May last year for $1.1 billion, will boost Yahoo’s value in the future. During the Q3 earnings call, Marissa Mayer said that Tumblr is expected to generate more than $100 million in revenue in 2015, primarily due to the successful introduction of sponsored advertising. Additionally, she said that Tumblr will achieve positive earnings before interest, tax and depreciation (EBITDA) next year on the back of strong audience growth, which has grown 40% to 420 million users, and strong monetization. Going forward, if Yahoo can successfully pitch the Tumblr platform to advertisers, its advertising revenues and valuation can increase significantly.

At present, we have a $47.29 price estimate for Yahoo!, which is 5% below the current market price.

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More Trefis Research

1. Yahoo Unveils New Products and Experiences for Smartphones, Web, Tablet and TV at CES 2014, January 7 2014, investor.yahoo.com [↩] [↩]
2. Yahoo’s Aviate Intelligent Home Screen App Launches for All, Gains Useful New Features, June 23 2014, www.yahoo.com [↩]
3. Yahoo Wants You to Linger (on the Ads, Too), June 21 2014, www.nytimes.com [↩]
4. US Mobile Ad Dollars Shift to Search Apps, June 5 2014, www.emarketer.com [↩]
5. US Mobile Advertising Spending To Reach $40 Billion By 2019, May 9 2014, www [↩]
6. Introducing Yahoo Gemini, February 19 2014, www.yahoo.com [↩]
7. US TV Ad Market Still Growing More than Digital Video, June 12 2014, www.emarketer.com [↩] [↩]