- Yahoo began as a leader in the web space but is now struggling to keep up with the changing landscape.
- The company, desperately in need of a turnaround, is overly reliant on ad revenues and their stake in Alibaba.
- Diversified revenue streams and improved user experience will go a long way to ensure a turnaround of any sorts.
During the 'dot com boom' Yahoo (NASDAQ:YHOO) was a leader in the internet space and was set to lead the world for the long-term. Such was the strength of Yahoo that the Yahoo stock stood at $108.17 at the end of 1999. However, due to a reluctance to diversify their revenue streams, Yahoo is today a shadow of its past. For instance, a look at Yahoo's individual entertainment pages reveals a company obsessed with displaying ads. As brands increasingly choose to 'splinter' their ad budget, this is simply not a sustainable business model.
Secondly, a huge part of Yahoo's market value can be attributed to its 15% stake in Alibaba (NYSE:BABA). And that is leaving investors worried. The fact that a multi billion dollar company is so dependent on the performance of another company is incredibly baffling.
Marrissa Mayer took over in 2012 when Yahoo was on 'life support'. At this moment in time, she has failed to turn the company around. Interestingly, Yahoo has remained largely unchanged since she took over, yet she insists that she needs more time. To be honest the issue facing Yahoo is glaringly obvious: they believe that they can trigger growth by offering people entertainment, sport etc. They try to syndicate as much of these content types as possible in order to increase ad inventory. In fact, even the Yahoo mail app is littered with ads.
When one wants to provide a solution to the Yahoo problem, it is worth doing some market research which Yahoo seems to have failed to conduct. When we look at their two biggest competitors, namely; Alphabet Inc-C (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) Bing, the difference is that they have core products which consumers keep coming back for. For instance, Google has Google docs, a user-focused Gmail, Android, and a world-renowned search engine. Secondly, Bing is famed for its clean interface, and it is also 'baked into' Windows 10 and Windows phones straight out of the gate.
Yahoo has proved stubborn in increasing the points through which consumers can interact with the company. As a result, they are having to be increasingly reliant on ad revenue; and let's not forget that a a significant portion of their content is licensed. This is simply an unsustainable model for growing a multi-billion dollar business.
Yahoo had such a stronghold on the internet during the 'internet revolution' that with an innovative and forward-thinking management team, they could have had a huge the slice of the social media industry, a huge cut of the video streaming market, and had their advertising revenue as a nice bit of change on the side. They need to acquire some startups and add them to their core product, or risk dying a slow and painful death.
Marissa Mayer has a gift for persuasion. Investors stuck with the company because she promised that Yahoo could become a strong competitor to Netflix. This had led to more than $100 million being spent on producing video content, with little to show for this effort.
Additionally, Yahoo is currently too reliant on partners to generate queries to their search engine, increase the user base, and ad revenue.
Are you beginning to see a pattern in terms of over-reliance and Yahoo?
Saying all this, Yahoo is currently taking strides to grow into the future. For instance, they recently broadcast an NFL live stream which was able to attract 3.2 million viewers. Perhaps, this could be a good new direction for Yahoo. Live streams can be used to generate ad revenue by partnering with big brands.
Yahoo Financial Performance
As compared to Q3 of 2014, Yahoo's net operating cash flow has reduced by an astounding 52.53%. Therefore, Yahoo has to find a lot of additional revenue in 2016, in order to restore trust in the stock, and show that they are moving forward. Moreover, after losing 34.33% of stock value over the past year, it has under performed the S&P 500, thereby raising some questions about how they can trigger a revival. It isn't due to lack of trying, as referred to earlier in this piece. The fact is management doesn't seem to have the foresight to realize that Yahoo needs to create more of their own content, and create tools in order to increase their usefulness from a consumer perspective. Most significantly, earnings per share are down by an incredible 98% as compared to Q3 of 2014.
In conclusion, Yahoo is going through a tumultuous period to say the least. However, investors will be hoping that Marissa and her subordinates can be more aggressive with regard to increasing revenue streams (diversification), and improving the user experience, which could go a long way in turning around yahoo financials, and also Yahoo stock price.