Yahoo!'s (YHOO, Financial) turnaround has hit a speed bump. In 2014, Yahoo! shares have declined, with the latest second-quarter results sending out a negative signal as the Internet company's advertising business declined once again. The increasing dominance of Facebook (FB) and Google is not giving Yahoo! enough room to improve its results in advertising, and this has weighed on the company's performance.
Yahoo!'s financial report was a disappointing one. Its revenue slumped from the year-ago period, falling behind the consensus estimate. CEO Marissa Mayer was visibly disappointed with the results, stating that "While several areas showed strength, their growth was offset by declines." Mayer stated that the company's top priority is to attain revenue growth, but sadly, that didn't happen in the second quarter. Yahoo!'s GAAP revenue declined 4% year-over-year to $1.08 billion in the quarter.
But, will Yahoo!'s situation improve going forward, or will competition from Facebook and Google hurt its advertising business further?
Making moves
Yahoo! isn't lying low, and management is undertaking some strategic moves to get the company back on the growth track. For example, it is scouting for new revenue opportunities, and is investing in new products as a result. Although its initiatives will take time to deliver tangible results, management is confident that they will help the company to attain sustainable growth in the long run.
Yahoo! is targeting four areas - search, communications, digital magazines, and video - to strengthen its long-term prospects, driven by its Flickr and Tumblr platforms. The company is also enhancing its mobile platform, and had acquired Aviate in January to improve its mobile features. Recently, Yahoo launched the Aviate app, and it met with tremendous success. After coming out of the beta phase in late June, Aviate's user base increased more than 2.5 times in the first week alone.
The company has done well to monetize the increasing number of mobile users. In the previous quarter, its mobile search revenue more than doubled year-over-year. Yahoo! credits this success to its Gemini, which now accounts for half of mobile display revenue in the U.S. With Gemini, the company has brought its mobile advertising features onto a single platform, improving the experience that it delivers to users.
Communication is another area in its product category, which saw considerable growth. During the quarter Yahoo launched a re-imagined mail app integrating search, news and content into the daily habit communicating with friends and family. This enables its users to catch up with the latest headlines, stocks and many more as they check their e-mail. It received a good response for its new features as time spent per user per day and page views have increased more than 70% compared to previous mail app.
Good strategies
Its digital magazine business continues to be strong as the company is reinventing the ways users experience digital content. Yahoo has made it more modern, impressive, complete with distinct editorial voices, and beautiful native advertisements. During the quarter it launched three new digital magazines namely Yahoo! Movies, Yahoo! Travel and Yahoo! Beauty, which are led by industry veterans. In addition, the company is pleased with its progress of Tumblr and took more meaningful steps in its monetization. Going forward the management sees digital magazine as an area of investment and opportunity for the company.
Coming to its video business, its second quarter was in line with the company’s plans. And yahoo continues to focus in this area with investments in unique premium content. Premium content draws premium advertisers and it had early success bringing these opportunities to market. Moreover it has also partnered with Live nation to broadcast one live concert everyday, which will further attract more users.
However Yahoo’s advertisement business does not seem to be well, as the company is facing various challenges in this area. As the company transitioned to Yahoo Ad Manager Plus it took extra time to ensure the product was delivering for its advertisers. And during this period, buying on Genome, which is its existing audience platform slowed down. And Yahoo had to pay a big price for this as its revenue decline year on year.
But from a long term perspective Yahoo Ad Manager Plus is an important driver in growing its display business. And even though it is in its early stage, Yahoo Ad Manager Plus has been well received by its audience. Speed is something that the company is especially proud about and it expects that speed will continue to guide its efforts to grow Yahoo!’s business. Going forward the management expects this to be a tremendous growth lever that will lead its business.
Conclusion
Currently Yahoo has a trailing P/E of 29.7, which seems to be good compared to the industry P/E of 34.62. But its forward P/E seems to be more attractive at 19.89, which shows that its earnings will improve in the future. Moreover its stock has declined around 10% since January and after that it has not seen much volatility in the past couple of months. But looking at its future prospects we can see more upside to this stock.
Although its performance for the second quarter was not impressive, the initiatives taken by the management could revive its growth in the future. Hence considering these factors Yahoo seems to be a good investment option.
