Exploring Yahoo’s Base And Bull Case Scenarios

Yahoo!’s ( NASDAQ:YHOO) stock has underperformed the markets for the first three months of this year, post-Alibaba’s listing on the U.S. stock exchange in the last quarter of 2014. The stock has declined by over 17% in first five months of 2015, while the return on NASDAQ composite index is close to 7%. One of the primary reasons for this underperformance has been Yahoo’s core business which has failed to deliver the necessary traction in revenues in the online ads industry. While the online advertising revenue in the U.S. rose by 16.9% year over year in Q3 2014 to $12.4 billion, Yahoo’s gross ad revenues declined by 1.3% to 4.61 billion, according to reports by the Interactive Advertising Bureau (IAB) and PwC US, ^[1] As a result, in order to shore up its revenues, Yahoo is focusing on rolling out more content and ad formats for mobile platform, developing more videos and investing in its programmatic platform.

All three verticals that Yahoo is focusing on are fast growing verticals. While mobile platform is leading the growth in the online ads industry (mobile advertising revenues surged by 76% during the first half of 2014 outpacing the 15.1% growth in the overall online advertising industry), ^[2]  programmatic ad buying is expected to increase by 47% in 2015 to $14.88 billion. ^[3] Furthermore, video ads are taking center stage in online display ads and slated to grow at a compounded annual growth rate (CAGR) of 19.5% by 2016. ^[4] Although that these scenarios have overlap, we have treated them separately as each theme warrants discussion of its own. In this article, we will explore the base and bull case for Yahoo’s advertising verticals.

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Base Case Scenario: Current Valuation

In our base case model, we believe that Yahoo’s core business revenues i.e. search, display, and other advertising will grow at a CAGR of 2.8% by 2021. We believe that there will be a marginal decline in its key revenue metrics, i.e., revenue per thousand search (RPS) and revenue per thousand impression (RPM) across all the divisions. While we expect RPS to decline to $9.56 in 2021, RPM from display will be at $0.91. According to our view, most of the upside to Yahoo’s valuation will be from the overall improvement in Internet penetration that should boost the number of users using Yahoo’s websites. We also think Yahoo is well positioned to capture a bigger chunk of programmatic spending in the future by leveraging its programmatic platform for mobile, video, and static display ads. Furthermore, Yahoo’s investment in Alibaba and Yahoo! Japan will continue to contribute a significantly to its stock value. We currently forecast a $44 price estimate for Yahoo!, which is in line with the current market price.

Bull Case Scenario: Everything Falls In Place, 30% Positive Impact On Stock Price Estimate

Content And Videos Can Boost Ads Revenues By 100% in 2021

Yahoo’s product development has been on a back seat for the last few years. This has hampered its key performance metrics such as revenue per search and revenue per impression across search and display. However, Yahoo launched new content such as Yahoo Food and Yahoo Tech that curate content, videos and photos from Flickr and across the web. The company is also improving the ad experience by integrating technologies from the acquired companies within its products. For example, the company has incorporated Tumblr’s advertising technology into its digital magazines. ^[5] Furthermore, Yahoo 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 launched its shows, Other Space and Sin City Saints, in 2015. These shows run in conjunction to older episodes of SNL 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.

If the company can boost user engagement, increase unique user count, and monetize its content more effectively through these efforts, it can boost its revenue metrics. These efforts can boost Yahoo search market share to 12.5% from 7.5% and RPS to $13.25 from $9.56 for the search ads division. Furthermore, its page views for its properties can improve to 210 from 155 and RPM to $1.25 from $0.91 for the display ads division. This would result in a 3% upside to Trefis’s stock price estimate and $4.7 billion in revenues.

Programmatic Platform Can Boost Revenues By $2.8 billion

In the last few years, online ad technology has undergone a rapid transition, largely due to technological and cultural shifts.  There have been innovations in how ad slots are bought and a proliferation of new contexts in which ads are viewed, including smartphones, tablets, online videos and social networking sites. With this profusion has arisen a degree of chaos in online advertising, which has created complexities for brand managers, agencies and publishers who are required to sort through the sprawl of available choices.

To take advantage of the rise in popularity of mobile and video ads, Yahoo acquired two programmatic ads companies in both the spaces. While Bright Roll (which provides RTB platform for video ads) was acquired in November 2014, Flurry (which specifically targets mobile ads through its programmatic platform) was acquired in July 2014. These forays can significantly boost Yahoo’s third party display (video) and mobile ad revenues and resurrect its faltering online ads business. According to eMarketer, advertisers spent $10 billion on programmatic platforms in 2014 in the U.S. It projects that this spending will increase to $14.88 billion in 2015. eMarketer also expects that programmatic buying will swell to $20.41 billion in the U.S. by 2016. ^[6] If Yahoo’s platform gains traction, its Average Revenue per User on third party sites can increase from $0.91 to $3.62. This could lead to 3% upside to Trefis’s stock estimate and $2.8 billion improvement in revenues.

Mobile Can Boost Revenues By $7 billion

The mobile platform is leading the growth in the industry, as mobile advertising revenues surged by 76% during the first half of 2014, which far outpaced the 15.1% increase in the overall online advertising industry. ^[2] Mobile advertising will continue to see rapid growth in the coming future, as the platform is under-penetrated within brand advertising budgets. According to a study by Forrester, the mobile platform accounts for merely around 5% of the average brand advertising budget. This is despite the fact that consumers spend a significant proportion of their leisure time on mobile devices ^[7]. According to data by Flurry (a mobile analytics company), Americans spend an average of 2 hours and 57 minutes daily on mobile devices as compared to 2 hours and 48 minutes on TV. ^[8]. The share of TV in the overall ad spending within the U.S. stood at 42.6% in 2014. ^[9] Hence, the share of mobile in overall advertising budgets is likely to rise rapidly in the coming years, in our view. According to Forester, mobile advertising in the U.S. will total $40 billion by 2019 ^[10]. eMarketer estimates that online ad spending in 2014 was at $18.99 billion. ^[11] In order to capitalize on this trend, Yahoo launched the unified ad market place for mobile search and native display advertising in February last year. ^[12]

This will empower developers with capability to combine their apps and content with bespoke ads to improve user experience. 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. Better user engagement will also boost its mobile unique users. The number of unique visitors is vital for Yahoo’s ad revenues as more people visiting the website generally translate into more pages viewed across Yahoo’s websites. Currently, Yahoo’s mobile monthly active user base stands over 600 million. If Yahoo’s mobile monthly active user base were to increase by 50% by 2021, its revenues could be meaningfully higher. Better content and user engagement can also increase the time spent on the website and advertisers are willing to pay higher revenue per impression for these sites. Yahoo is ranked third in terms of time spent by a user on the website. ^[13] In the last earnings call, Yahoo stated that it has revenues run rate of over one billion dollars from mobile devices, which was spread across its divisions. Currently, we expect Yahoo’s display ad revenues to increase to $1.8 billion and search ads to grow to $1.6 billion by 2021. If Yahoo can capture 10% of mobile ads through its ads and development efforts, then its ad revenues can be higher by $7 billion in the future. This could lead to 15% upside to Trefis’s stock estimate.

Impact Of Tax Free Spin Off Of Investments

While Alibaba and Yahoo! Japan have added immense value to Yahoo’s stock holders, the tax outflow, if the investments were to be liquidated, would reduce Yahoo’s investment by close to $12 billion. However, in the previous earnings announcement, Yahoo said that it was planning to spin off these investments into a separate company and looking at ways to reduce the tax liabilities. If this were to come to fruition then Yahoo’s stock price can increase by over 25%.

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More Trefis Research

1. Q3 2014 Internet Advertising Revenues Hit $12.4 Billion, Making it the Highest Quarter on Record, Interactive Advertising Bureau, December 18, 2014 [↩]
2. IAB internet advertising revenue report, Interactive Advertising Bureau, October 2014 [↩] [↩]
3. US Programmatic Ad Spend Tops $10 Billion This Year, to Double by 2016, October 16 2014, www.emarketer.com [↩]
4. The High Performance Of Online Video Advertising Is Helping It Grow Much Faster Than Other Ad Mediums, August 25 2014 [↩]
5. Yahoo Wants You to Linger (on the Ads, Too), June 21 2014, www.nytimes.com [↩]
6. US Programmatic Ad Spend Tops $10 Billion This Year, to Double by 2016, October 16 2014, www.emarketer.com [↩]
7. Why Do Brands Have Such Small Mobile Advertising Budgets? [Study], ClickZ, September 16, 2014 [↩]
8. Mobile to Television: We Interrupt this broadcast (Again), Flurry, November 18, 2014 [↩]
9. 2015 Ad Spend Rises To $187B, Digital Inches Closer To One Third Of It, TechCrunch, January 20, 2015 [↩]
10. US Mobile Advertising Spending To Reach $40 Billion By 2019, May 9 2014, www.forester.com [↩]
11. Yahoo Poised to Pass Twitter in US Mobile Ad Share by 2015, December 4 2014, www.emarketer.com [↩]
12. Introducing Yahoo Gemini, February 19 2014, www.yahoo.com [↩]
13. Most visited websites in the United States in April 2014 by user engagement, May 2014, www.statista.com [↩]