Investors Give Yahoo Benefit of Doubt

Yahoo posted its third-quarter earnings report Tuesday, revealing a revenue and earnings slide as it continues to make acquisitions and launch new products.

The company reported US$1.08 billion in revenue excluding traffic acquisition costs, a 1 percent dip from the same period a year ago.

Profit dropped to $297 million, or 34 cents per share — a 91 percent drop from a year earlier since last year when Yahoo reported a $2.8 billion gain from selling some of its stake in Alibaba.

Weak Outlook

CEO Marissa Mayer said she was pleased with Yahoo’s execution, especially considering the recent investments the company has made in order to bolster business. Yahoo has spent heavily on acquisitions, picking up several startups in the hope of driving user growth to attract more ad dollars going forward.

Those investments have not yet paid off with display ad revenue. Yahoo brought in $421 million in display ad revenue in the quarter, down 7 percent compared with the same period a year ago. Ads sold (excluding Korea) were up 1 percent, but the price-per-ad decreased 7 percent.

Search ad revenue didn’t fare much better. Yahoo reported $426 million revenue in the space, a 10 percent dip from a year earlier.

Yahoo’s fourth-quarter outlook was weaker than expected, with the company forecasting revenue of $1.18 billion to $1.22 billion, lower than the $1.25 billion that analysts had predicted.

New Deal With Alibaba

Yahoo also announced a change to its agreement with Chinese e-commerce company Alibaba, reducing the maximum number of shares it is required to sell in Alibaba’s IPO by 20 percent.

Given Alibaba’s strong performance recently, that announcement is likely to please shareholders, said Brian Wieser, an analyst with Pivotal Research Group.

In fact, Yahoo’s stock was trading relatively flat, closing at $33.09 Wednesday in spite of the lackluster earnings report.

Investors are counting on significant gains from Yahoo’s stake in Alibaba, but they also need to have faith that Yahoo is going to spend those gains wisely, Wieser said.

“As it seems likely that the IPO will price Alibaba below where the stock will ultimately trade — obliging Yahoo to sell fewer shares will ultimately benefit Yahoo shareholders — this is probably a positive turn of events,” he told the E-Commerce Times.

“However, focus should increasingly move towards the manner in which Yahoo will deploy the capital it generates from the sale,” suggested Wieser, “and before that, how it might avoid a meaningful tax hit.”

Long-Term Growth

Investors are convinced that Yahoo will make the most of its relationship with Alibaba, said Anindya Ghose, associate professor at the NYU Stern School of Business.

The company therefore has not been subjected to the kind of investor scrutiny that’s typical when a company is rebuilding, investing, and launching new products in order to compete.

“The market is reacting positively to Alibaba’s forthcoming IPO, and Yahoo — which has a 24 percent stake in Alibaba — will likely see its stock rising,” he told the E-Commerce Times.

“Also on the bright side, last quarter, the company acquired eight startups that resulted in a 20 percent increase in Yahoo’s traffic, which reached 800 million monthly users in September,” added Ghose.

Unless Yahoo can prove those investments can be converted into advertiser dollars, it will continue to face challenges going forward, he predicted.

“Yahoo’s biggest concern now is the continuously declining revenues from display advertising compared to Google and Facebook,” said Ghose. “In an increasingly competitive display environment that is shifting towards programmatic buying, it is going to be an uphill battle for Yahoo to figure out how to improve revenues from display ads that has declined for the fourth consecutive quarter of year-over-year declines.”