Why Yahoo sees an upside as Marissa Mayer attempts a turnaround

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A new CEO

Yahoo (YHOO) was established in 1994 and was able to successfully use its first-mover advantage in Internet searches to become the fourth-ranked site by global traffic today. However, despite the site’s far reach, the company has languished in recent years, as newer entrants like Google (GOOG) and Facebook (FB) seemed to displace Yahoo, capturing a larger share of the Internet audience. Following a public battle with the activist hedge fund Third Point, Yahoo appointed Marissa Mayer, a former Google executive, as CEO in July 2012 to turn the company’s prospects around. Under her tenure, the stock has more than doubled from $15 per share to over $36 today. Yahoo is part of the First Dow Jones Internet Index ETF (FDN), whose primary focus is to match the performance of the Dow Jones Internet Composite Index.

YHOO_Evaluating the Turnaround_1_Adjusted EPS

Business model

Yahoo’s largest source of revenue comes from the sale of display ads such as graphical banners or short video clips. To achieve high pricing for ads, Yahoo must demonstrate that it has an active user base viewing its pages. This model is effectively similar to newspapers, which typically sell ad space on their pages and must maintain high circulation numbers to attract potential advertisers.

In the past, Yahoo had been criticized for failing to grow its user base due to unappealing content and tools on its Internet properties. In response, Mayer attempted to address this concern through redesigning the web portal, renewing emphasis on mobile sites, and expanding into social media through the $1.1 billion acquisition of Tumblr.

Earnings improve

Since she began her tenure, Mayer has had a clear positive impact on Yahoo’s earnings power. Adjusted earnings per share for the first three quarters of 2013 totaled $1.07—11.5% higher than the same period last year. However, it’s yet to be seen whether these results will translate into a more permanent improvement in profitability. It will be important to carefully track value drivers such as user engagement and ad pricing to determine whether Yahoo’s recovery is sustainable.

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