Yahoo! – Wrong prescription

AOL is not the answer.

• A recent open letter from activist shareholder Starboard has correctly diagnosed all the issues at Yahoo! but its prescription will not fix the company.
• There is no doubt that performance of the core business has been extremely disappointing over the last 2 years.
• Revenues in its display and search based online advertising business have been essentially stagnant despite strong growth at almost all of its peers.
• Google, Facebook, Twitter and many other who earn revenues from online advertising have all seen strong growth particularly from mobile and video.
• Hence, it is clear that Yahoo! has chronically underperformed both its peers and the market.
• The main reason for this is that it predominantly earns its revenues from display based advertising which is the slowest growing and least attractive of all online advertising.
• Its share price performance has simply been a factor of its stake in Alibaba which has shielded shareholders from the underperformance of the core business.
• Now that Alibaba is listed, the attention is already turning back to the core business and Marissa Mayer’s grace period has now run out.
• There is certainly substantial value to be unlocked at Yahoo! as the company is trading at a discount to the value of its Asian assets alone.
• However, the solution offered by Starboard goes no further than unlocking value that is already there and in my view, substantially increases risks.
• There is rationale for a merger with AOL but the vast majority of mergers of this type don’t work and could actually end up costing shareholders money.
• The real solution for Yahoo! is to find a way to return the company to revenue growth.
• This basically means taking Yahoo! superb position in the fixed line Internet and migrating it into mobile.
• It is in mobile where the growth is and where advertisers are spending their marketing money.
• Yahoo! has made the right acquisitions as it position in Digital Life is now excellent but it has badly failed to make anything of them.
• If Yahoo! can migrate its usage into mobile, revenue would start to grow again, the discount would correct and shareholders would be happy.
• Furthermore, shareholders would be inclined to hold the stock for the long term rather than getting out as soon as the value is released.
• This is what the acquisition strategy has tried to achieve but poor execution has prevented Yahoo! from integrating its acquisitions into a coherent ecosystem
• This is what is desperately needed to turn this company around and this is where shareholders should be pushing management to act.
• Yahoo! remains attractive but the inability to execute its vision is showing through in the results and shareholder patience is already wearing very thin.
• I would look at Google or Microsoft for holding positions in the mobile ecosystem and think that the time has come to take Alibaba-related profits on Yahoo!.