is just a little misunderstood.
A fresh wave of speculation again surrounded the beleaguered Internet giant this week. And as usual, commentators offered a black-or-white look at the company and its stock: It's either so outrageously undervalued that it's a must-buy (
as Bear Stearns suggested last week) or it's doomed, with its high-profile turnaround bid all but lost.
But the reality is much more complex. Rather than buying the stock on "it must be cheap" principles or dismissing the company outright, investors should instead watch the company closely for signs that a legitimate turnaround is materializing.
And while the jury is still out on whether new CEO Jerry Yang can in fact turn this Internet oil tanker of a company around, investors should give him a fair shot before writing the company off.
The impetus this week was for investors to throw in the towel. "After meeting with management in August, we decided that the management isn't considering the kind of transformational changes that would be required to improve their position in the market,"
The Wall Street Journal
quoted Integral Capital Partners managing director Glen Kacher as saying on Monday.
Kacher told the
that Yahoo! could unlock "massive earnings power" if it simply outsourced search to
-- as well as revealing that he had liquidated his entire position in the company following a mid-August meeting with Yahoo! President Sue Decker and Chief Financial Officer Blake Jorgensen.
Shares of Yahoo! fell more than 2.5% on Monday. The stock closed Thursday up 16 cents to $23.72.
But investors should commend Yahoo! for resisting the temptation to garner a quick bump to its revenue by partnering with Google -- which makes more money on every search -- at the expense of its long-term strategic position.
After all, Google is Yahoo!'s biggest rival. And if Google decided to abandon a partnership in the future, Yahoo! would be left disastrously behind if it tried to restart another search business. That's because along with the power of a search engine's algorithm, the amount of user-generated data about prior searches determines its power.
What's more, Yahoo! would lose even more ground to other non-Google competitors like
The slip in the power of its search would ultimately hurt Yahoo!'s ability to sell ads in other mediums as well, because advertisers are looking to manage categories like search, display, video and mobile in a more closely linked manner.
There was also hysteria this week about Yahoo!'s traffic growth, which researcher Comscore noted slipped 1% year over year. "The only trend that train-wreck Yahoo had going for it -- global user growth -- is no longer going for it," tech blog
commented on Tuesday. "If the company can't reverse this trend in short order, its only hope will be to sell itself."
But there are strong indications that Yahoo!'s emerging strategy will heavily emphasize selling ads on non-Yahoo! properties. On Thursday, the company announced it would sell the majority of advertising for
, a popular social networking site. Last week, Yahoo!
bought ad network Blue Lithium , which will give it access to ad space all over the Web.
Yahoo! also has announced an ad-selling partnership with a consortium of newspaper companies.
So to focus solely on traffic growth on Yahoo!'s main site could be misplaced.
That's not to say there haven't been developments that raise concern for investors. In an effort to rake in short-term ad revenue, the company appears to be plastering its properties with garish advertising.
Ads placed on popular properties like Yahoo! Finance and Yahoo! News appear to have grown noticeably more prominent and distracting over the last few months, for example.
"Yahoo! may be impeded in its near-term user and usage growth by attempting to compensate for recent shortfalls in revenue growth with more aggressive advertising," JMP Securities analyst William Morrison wrote in a research report on Monday. Some ads tend to be large, distracting, not targeted or relevant to users, he added. JMP Securities makes a market in Yahoo! shares.
Yahoo! management should reverse this trend immediately. After all, Google's relentless focus on the user experience and noninvasive forms of advertising have played a major role in its success.
Potential Yahoo! investors, meanwhile, should keep a close eye on developments at the company rather than buying into the hype of one side or the other.