What Investors Want from Yahoo’s New CEO

While Carol Bartz’s ouster as CEO gave Yahoo (NASDAQ:YHOO) a 6% boost following the news, ^[1] expectations from the new CEO will be sky high. The wish list from Yahoo investors will be long and includes safeguarding Yahoo’s interest in Alibaba, reviving its declining search and display revenues and perhaps even prepping the company for a potential takeover or merger. Yahoo has been at the mercy of Google (NASDAQ:GOOG) and Facebook the last few years as the former is dominating search advertising and the latter is quickly gobbling up display advertising market share.

We believe that the company still has solid assets and market share, particularly in Asia, and is in the process of attempting a massive turnaround. This will require strong leadership, and at least according to Bartz, the company needs another year before the results show up in revenues, which will ultimately drive the stock.

We currently have a price estimate of $17 for Yahoo’s stock, which is about 30% above the current market price.

Yahoo’s Asian Holdings are Crucial

With steadily declining advertising revenues, Yahoo’s stakes in Yahoo Japan and Alibaba form most of the company’s overall value (represented by “Strategic Investments” in the Trefis model). While Japan still continues to be a lucrative market for Yahoo, the company has faced problems with its 40%+ stake in Alibaba, which was plagued recently by the controversial ownership transfer of Alipay – the payment unit of Alibaba. ^[2] The stand-off was worsened by the fact that Bartz’s relation with the Alibaba group were strained. Even though the dispute was finally resolved, Yahoo’s stock took a hit.

Yahoo’s future leadership has to ensure its shareholders that Yahoo’s Asian investments are safeguarded and that incidents like Alipay are not repeated. The company can even explore other options such as divesting its heavy stake in Alibaba, which the company has resisted doing in the past despite several attempts by Alibaba to buy this stake back.

Damage Control Required in Online Advertising

Since Bartz was brought in as CEO, Yahoo really has not seen the turn around it expected. To Bartz’s credit, heavy restructuring and layoffs did improve bottom-line results (Yahoo’s operating expenses reduced by about 9% in 2010 while its pre-tax income grew by 86% to over $1 billion). ^[3]

However, Yahoo’s market share has continued to slide due to competition as its advertising revenues are steadily declining. According to comScore, the monthly time spent by U.S. web visitors on Yahoo sites has dropped by 33% since Carol Bartz’s arrival. Even in the search market, the Yahoo-Bing alliance has failed to raise top-line for Yahoo, with its Q2 2011 revenues dropping close to 45% over last year. ^[4]

While fresh leadership could help Yahoo, there will be no panacea. Recent reports now say the board is coming under fire from investors, and in order to complete a major turnaround that saw its search business being handed to Microsoft’s Bing, the company needs strong leadership that will address the crucial issues.

See our full analysis for Yahoo

1. Wall Street Journal: Yahoo Ousts Bartz as CEO [↩]
2. Bloomberg: Alibaba Resolves Dispute With Yahoo, Softbank Over Alipay Unit [↩]
3. Yahoo Investor Relations: Yahoo! Q4 2010 Earnings Results [↩]
4. Yahoo Investor Relations: Yahoo! Q2 2011 Earnings Results [↩]