Despite a growing anticipation of the IPO of China’s Alibaba Group — which some analysts are predicting will debut at upward of $150 billion in value — the shares of Yahoo have taken a big hit in recent weeks, largely due to the penny finally dropping with investors that the core business of the Silicon Valley Internet giant is very hard to fix.
The stock hit a high of close to $42 a share in January and has dropped close to 18 percent since then to about $34. This is due to a variety of worries, including Yahoo’s continued weak advertising performance, even as rivals thrive. Also perplexing: An unusual new push by CEO Marissa Mayer into video, including the creation of a competitor to YouTube (which I am dubbing Ya-Tube).
By the way, according to many sources, she’s still at it, ferreting away at signing up professional partners and grabbing some video makers from Google’s powerful video service. In addition, Mayer has been personally screening long-form original online shows to select them for a Yahoo video product, in a related bid to also be more like Netflix, according to a variety of reports and sources.
This all comes after a frenetic series of acquisitions of small mobile-focused startups, in order to up Yahoo’s expertise and mobile usage. As exciting as this has been, though, Wall Street is now wary given there is no evidence as yet of significant monetization of the important arena as has happened at Facebook.
Added to all that is another ambitious effort to build her own mobile search engine and to remove Yahoo from its underperforming search deal with Microsoft. That’s logical, because search revenue is a potentially important area of growth for Yahoo.
Still, no wonder there has been a pullback in shares as Wall Street tries to grok Mayer’s strategy in all this interesting, though perceptually confusing and frantic, activity.
That’s why it will be riveting to see how she will portray it all later today in the livestream of the Yahoo Q1 report, starring Mayer and CFO Ken Goldman on the set of what looks like a TV news broadcast.
For the quarter, Yahoo had forecasted that it expects revenue — minus traffic acquisition costs — to be in the $1.06 billion to $1.1 billion range, with non-GAAP operating income between $130 million and $170 million.
Analysts are estimating now that Yahoo will report earnings of 37 cents per share on revenue of $1.08 billion, compared to last year’s 38 cents per share on revenue of $1.07 billion.
Will there be an upside surprise? Unlikely on revenue, given the volatility in Yahoo’s management in the area, including the Q1 firing of its COO Henrique De Castro, who was spearheading the sales efforts. Given that, Mayer has been searching for a chief revenue officer to mind the gap.
The company’s main man in charge of sales — Americas head Ned Brody — is now the one on thinner ice than usual given the weak revenue performance. Of late, he’s been touting native ads powered by Tumblr, the publishing platform that Mayer bought for upward of $1 billion in 2013.
In a recent interview with Advertising Age, Brody noted:
“No one ever said that that display number you’re looking at is the way for revenue to grow. Revenue is a portfolio of lots of different products: Stream Ads, programmatic ads, search, mobile. And with any portfolio, you have businesses that are continuing to grow and you have things that actually don’t grow as quickly. Look at the market in general. The core display businesses of the market are actually declining, while things like native and programmatic are growing.”
Sounds good! And if Mayer could do more showing rather than telling — which investors are clearly tiring of — here in the quarter, it would be well-received.
Speaking of Tumblr, it will also be interesting to see if Mayer can give investors some good news there, since the fruits from that large acquisition seem unclear. Sources said it is possible that its user numbers will finally be folded into Yahoo’s which will allow the company to claim upward of one billion customers, up from 800 million for Yahoo, served on a regular basis. More importantly, it will make mobile numbers — now quoted at 400 million — even more tasty-sounding.
Again, just a trick of moving existing numbers around, but a more impressive statement to make overall.
Along with revenue growth, Wall Street is also looking for cost cuts, which is something Goldman has been attuned to. A few weeks ago, rumors rocketed around the company about massive layoffs — up to 1,000 — that might take place.
Not so far, with Mayer preferring to use her controversial stack-ranking efforts to remove underperforming employees, many of whom call the method “silent” and “sniper” firings. (Ouch!)
Mayer is also likely to repeat once again her wait-and-see refrain of people, then products, then revenue, which sounded pretty good a year ago and less so now, as Wall Street expects more substantive results in 2014.
Luckily for Mayer, there’s always the golden Alibaba stake, which is expected to continue to boost Yahoo shares, at least until the expected IPO in the fall. As always, some key Alibaba fourth-quarter results will be included in the Yahoo results later today, which investors are eager to see.
They should be impressive, since the quarter includes huge activities like shopping on Single’s Day (November 11) and it compares to the seasonally slow third quarter.
What will be interesting, though, is one theory floated to me about how the Alibaba IPO goes: If it’s higher than expected, then the core of Yahoo is virtually worthless to investors; if less, then the core will be more valuable.
Once Alibaba goes public, we’ll know.
But analysts are already assuming the former. In a note this week, for example, SunTrust’s Robert Peck put a buy on Yahoo shares because of this concept, noting Yahoo’s main business was free, due to its Asian assets:
“Our analysis indicates that after adjusting for Yahoo!’s ownership of Yahoo! Japan and Alibaba, that investors are essentially getting the core Yahoo! asset for free. Taking the taxed current market value for Yahoo! Japan (which is down ~18% in the last month) and assuming a $150b IPO for Alibaba with a $200b ultimate value for Yahoo!’s stub remaining position accounts for $29 per share for Yahoo. Subtracting out the ~$4b of net cash, an investor is paying -0.2x EBITDA for Yahoo!’s core.”
It’s a fascinating premise and one investors might like, given that free is the best price of all. Describing an ongoing and thriving business, though, it leaves much to be desired.
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