Yahoo from Both Angles


Yahoo (NASDAQ:YHOO) competes with Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), AOL (NYSE:AOL) and Facebook in the display as well as search advertising market. Here we explore upside and downside scenarios for Yahoo’s display and search advertising business, which account for around 18% and 17% of our $17.88 price estimate for Yahoo stock respectively. Our price estimate is roughly 5% ahead of market price.

8% Downside – Yahoo RPM Rates Continue to Decline

Yahoo’s revenue per page view (RPM) has declined from around $1.39 per 1,000 page views in 2007 to $1.02 in 2010, but we expect a rebound to around $1.22 per 1,000 page views by the end of our forecast period.

The U.S. online advertising market has made a comeback since the recessionary period in 2009, growing by 14% from $22.7 billion in 2009 to $25.8 billion in 2010. [1] We anticipate continued growth in this market going forward.

However, Yahoo’s U.S. online ad revenues actually dropped in 2010 as the company saw a downtick in its market share. [2] Yahoo seemed to be unable to leverage the ad market growth, lagging behind peers like Google and Facebook. This adds a bit of risk to our bullish estimates for Yahoo’s RPM.

Yahoo RPM declined by around 5% from $1.07 in 2009 to $1.02 in 2010, despite the better year for the overall online advertising market. If we extrapolate this decline into the years ahead, it would imply RPM of about $0.7 per 1,000 page views by the end of our forecast period (vs. the $1.22 that we currently forecast). This scenario would produce an 8% downside to our $17.88 price estimate for Yahoo stock.

5% Upside -Yahoo Operating Margins Improve

Yahoo has taken a few cost cutting steps to offset top-line revenue declines as mentioned above. For one, Yahoo has reduced its workforce in order to cut operating expenses (See Yahoo’s Cost Cutting Initiatives Can Lift Profit Margins, Stock Value).

Yahoo has also partnered with Microsoft to utilize Microsoft’s search technology for Yahoo searches. According to the agreement, Yahoo will keep most of the revenues, while Microsoft will bear the majority of the operating expenses associated with Yahoo’s search advertising business. Although this deal means that Yahoo will lose the ability to proprietarily innovate its search business, the agreement will spur notable operating cost savings.

See our full analysis and $17.88 price estimate for Yahoo

Yahoo’s operating margins have shown signs of stabilization in the past few quarters, and we anticipate this trend to continue for the foreseeable future. However, if cost savings initiatives gain further momentum and Yahoo grows its display advertising margin to 36% and increases its search advertising margin to 50% by the end of our forecast period, there could be 5% upside to our $17.88 price estimate for Yahoo stock.

  1. eMarketer: U.S. online ad market, March 2011 []
  2. eMarketer: Net U.S. Ad revenues and market shares of 5 top players, March 2011 []