Yahoo: More Room to Run?

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Yahoo!  has done very well in 2013, with shares at 52-week highs. The company has made stellar progress in acquiring valuable technological assets, and has seen an increase in user traffic to its various online portals. The company's decision to hold onto a larger part of Alibaba will increase the company's value when the e-commerce giant enters the public market in a much-anticipated IPO. 

Rising traffic and user base
Yahoo! launched a number of new initiatives, including a redesigned logo to jump-start its goal to drive traffic and increase user engagement. The company's strides are paying off, as the number of monthly active users on Yahoo! during the third quarter was 800 million, the company's highest level ever. Yahoo!'s mobile user traffic stood at 340 million in Q2, which later surged to 390 million at the end of the last quarter.

In the U.S., Yahoo! sites had a monthly user traffic base of roughly 196 million for the month of October, slightly ahead of Google's 194 million, according to comScore. The company developed more personalization for Yahoo! users, which has likely been a solid positive for the increasing number of visitors to various Yahoo! sites. Yahoo! is adding more premium content through partnerships with various media companies like ABC and NBC, which should translate into higher revenue from video ads. 

However, when it comes to search, Google still has a huge lead over Yahoo! and Microsoft's Bing. In November, Google's search market share in the U.S. stood at 66.7%, whereas the market share of Microsoft and Yahoo! stood at 18.1% and 11.2%, respectively, according to comScore. Google has a gigantic lead over its competitors, and it's likely to remain that way, but Yahoo! has a lot of room for improvement in the search engine business. 

Yahoo! showing signs of improvement
The company's surging traffic levels and increasing number of mobile users hasn't translated into higher revenue yet, but is expected to do so in the near future. In 3Q 2013, Yahoo!'s top-line revenue declined 5% year-over-year to $1.14 billion. Yahoo!'s display revenue in the last quarter stood at $470 million, which is a 7% year-over-year decline. The number of ads shown on various Yahoo! properties increased only 1%, but the pricing on display ads decreased 7%. 

While this may be perceived as a negative, Yahoo!'s CEO stated in the most recent earnings call that the company is trying to gain a broader audience first, and only then will it focus on monetizing those users. In the search business, revenue for 3Q 2013 stood at $435 million, an 8% year-over-year decrease. However, paid clicks increased 21%, but price per click declined 4%. Yahoo!'s lead competitor in the search engine market, Google, is also strongly growing paid clicks, but at a lower price. 

Going forward, a larger and more engaged audience on various Yahoo properties should trend higher. The company's Tumblr asset is seeing steady growth in user traffic, especially on mobile devices. The acquisition hasn't reaped benefits yet, but is expected to be a revenue-generating asset in the future. Yahoo!'s management expects Tumblr to be accretive to EBITDA starting in 2014, after it gains more users. 

Alibaba IPO will bring in a lot of cash
In 3Q 2013, Yahoo! amended its agreement with Alibaba on the number of shares Yahoo! is required to sell in an IPO. Yahoo! was previously required to sell a maximum of 261.5 million shares from its total holdings of 523.6 million shares, but the parties agreed to reduce that amount to 208 million shares. This altered understanding will reap incremental benefits for Yahoo! shareholders because of Alibaba's explosive revenue and profitability growth. An Alibaba IPO will bring in a lot more cash for Yahoo! because the company would be required to sell a large portion of its stake in Alibaba.

Yahoo!'s diluted EPS last quarter stood at $0.28 and can grow in the future if the company continues to buy back shares at a healthy pace. Yahoo!'s share repurchase plan has been fruitful in 3Q 2013. The company bought back 59 million shares at an average price of $28.53, utilizing $1.69 billion of funds. 

Alibaba's valuation in the public markets is likely to be very high in an IPO. The Chinese e-commerce giant grew revenue 61% year-over-year to $1.74 billion, and its net income grew 159% year-over-year to $707 million. With more Chinese consumers shopping online, the value of Alibaba can only head north. Yahoo! will be a major beneficiary of this growth in the Chinese e-commerce sector.

Going forward
Yahoo! is very likely to transform this larger and more engaged user base into meaningful revenue growth. Yahoo!'s ability to develop and grow mobile users is a strong positive because it will translate into mobile ad revenue down the road. As more consumers adopt mobile devices, more advertising opportunities will emerge. As a result, Yahoo!'s stock price should move higher, driven by increases in organic revenue, the surging value of Alibaba, and continuing share repurchases.

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The article Yahoo: More Room to Run? originally appeared on

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google and Yahoo!. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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