Yahoo (NASDAQ:YHOO) recently announced weak Q2 2011 earnings that showed its search and display businesses are limping along as it tries to compete with Google (NASDAQ:GOOG) in search and Facebook’s ascent in display advertising. Net search revenues excluding traffic acquisition costs (TAC) reached just over $1 billion for the quarter, a 15% decrease over Q2 2010. The decline was attributable to lower revenue-per-search from the Yahoo-Microsoft search alliance due to the problems being faced by Microsoft’s adCenter technology. A reorganization of the sales team within the company also contributed to overall sales decline as Yahoo was left understaffed towards the end of the quarter. 
Our revised price estimate of Yahoo’s stock stands at $16.90, which is about 15% above the current market price, assumes that Yahoo will get its display and search business back on track, going forward. We have adjusted the price based on revised forecasts of Yahoo’s search market share and revenue-per-search values. Our estimates have also varied based on changes in net cash/debt positions over last quarter.
Yahoo-Microsoft Alliance Shows Weak Results
The Yahoo-Microsoft alliance continued to fall behind expectations in Q2 2011. Technical issues in Microsoft’s adCenter platform led to revenue-per-search (RPS) being lower than expected for the quarter. These problems have also seem to have adversely affected Yahoo’s search market share in the U.S., which declined from 19.6% in May 2011 to 17.5% in June 2011,  while Google stayed dominant at 65.5%. With its upgrade of the adCenter continuing through next year,  we expect both search market share and RPS to decline as competitors take advantage of these gaps/inefficiencies.
Display Growth Has Been Sluggish
Growth in display revenues (excluding TAC) was close to 5% over Q2 2010, considerably lower than the 10% growth in Q1 2011 over Q1 2010. According to the earnings conference call, the decrease is attributable to a shuffle in the company’s sales leadership structure as well as changes in the sales force, which led to reduced client interaction for the quarter. 
With both Google and Facebook gaining significant market share in the ad display market,  it is crucial for Yahoo to maintain a double-digit display revenue growth to keep pace in the future.
Display advertising accounts for 22% of our Yahoo valuation, and our near $17 price estimate assumes that Yahoo will see a recovery in its display revenues. If growth remains below trend going forward and if search revenue fails to pick up, we could see some downside to our forecasts.Notes: