Don't Give Up On Yahoo!'s Growth

NEW YORK (TheStreet) -- In January, Yahoo! (YHOO) CEO Marissa Mayer revealed that by the end of 2014, Yahoo!'s mobile traffic will surpass its PC traffic. A week later, Yahoo! released its quarterly results, which beat the market's earnings estimates.

The company's shares sank, however, despite the earnings beat. Yahoo! has suffered with declining revenue, particularly from display ads, with a shrinking share in the U.S display market. Moreover, the company's guidance for the current quarter came below market expectations.

Alibaba -- a company in which Yahoo! holds a significant stake -- also gave results that have been criticized. But Alibaba can post considerable revenue growth in the next quarter. Meanwhile, Yahoo! continues to grow its traffic, particularly in mobile.

The CEO has proven her ability to turnaround Yahoo!'s declining global traffic numbers. She now has to prove her ability to translate the higher traffic into increasing ad sales.

Yahoo!'s shares have been under pressure this year, showing a decline of 6% since January, and are currently trading at around $38.

Investors should watch out for the impending Alibaba initial public offering and the expected increase in Alibaba's revenue for the current quarter, as well as an end to Yahoo!'s declining display-ad sales. Any of these could turn into a catalyst for an upside for Yahoo! investors.

The Earnings Beat

In its fourth-quarter results Yahoo! reported a 6% year-over-year decline in revenue to $1.27 billion, which came in line with analysts' estimates. On the other hand, its net income rose 28% to $348.2 million from a year earlier. This translated into a 31% growth in adjusted earnings to 46 cents per share, which was better than market's expectations of 38 cents per share.

The revenue of search-engine firms, such as Yahoo! and Google (GOOG), are also reported in terms of traffic acquisition costs, or TACs, the payments made by these firms to their partners and affiliates for diverting traffic to their Web sites.

The company's revenue from display ad sales, excluding the TAC, dropped by 6% from last year to $491 million. Although the number is negative, it shows a slight improvement from a decline of 7% in the previous quarter. Meanwhile, Yahoo!'s search revenue dropped by 4% to $464 million. However, excluding the TAC, the search revenue were up 8% from the corresponding quarter last year to $461 million.

Since Marissa Mayer took control of Yahoo!, investors have been focusing on the company's growth. However, the recent quarterly results mark the fourth consecutive quarter in which Yahoo!'s revenue have dropped. This has to be frustrating for the shareholders who have been anxiously waiting for a turnaround of Yahoo!'s fortunes.

Moreover, according to data provided by comScore and eMarketer, excluding mobile Yahoo! gets a bigger share of the Internet traffic than Google but the company's share in the lucrative U.S. display ad market has fallen. Last year, Yahoo!'s market share dropped to 5.8% from 6.8% in 2012. Yahoo! has fallen even behind Facebook (FB), which is a newcomer to the industry compared to Yahoo!. In 2013, Facebook's market share stood at an impressive 7.4%, rising from just 5.9% in 2012.

Although the two companies do not directly compete with each other in terms of their service offerings, they do compete for the same ad dollars.

For the current quarter, Yahoo! is expecting a significant drop in operating income from $224 million a year ago to between $130 million and $170 million. Furthermore, the company's decision to hold back its annual guidance was also disappointing.

Looking at the Positives

Yahoo! has also announced the quarterly results of the Chinese e-commerce giant, Alibaba, in which the company owns a 24% stake. Alibaba witnessed a 51% year-over-year increase in revenue to $1.8 billion in its third quarter. Alibaba also swung to a profit of $801 million, from a loss of $246 million in the same quarter of 2012.

This looks impressive, but Alibaba's revenue growth has slowed from the 61% growth in the second quarter. Moreover, the loss reported in 2012 was due to $550 million of royalty payments made to Yahoo! Analysts, on the other hand, were expecting better income from higher sales.

However, investors should note that Alibaba's third-quarter results do not include the sales held on Nov. 11 and Dec. 12, two of the busiest shopping days in China. In the next quarter's results, with the addition of sales from these dates, Alibaba could post a big increase in revenue, which should make up for the current slowdown.

Meanwhile, Yahoo!'s efforts to break into the mobile arena have helped it to generate higher traffic. In the previous quarter, Yahoo! surpassed the 400 million monthly mobile-users milestone.

So far, Yahoo! has not been able to monetize this growing mobile user base. Its hundreds of millions of mobile users actually make little contribution towards its revenue. However, Yahoo! is strengthening its mobile products as well as mobile advertising. Therefore, the company should be able to report increasing revenue from this area in the future.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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