Yahoo is in trouble, and plenty of people are questioning whether Marissa Mayer can turn things around.
In three years under CEO Mayer, profit in the company’s core business has declined. Yahoo makes money through searches and display advertising. Revenue outside of desktop ads is growing, but not fast enough. Despite valiant efforts to catch up to competitors Google and Facebook in mobile ads, Yahoo remains a distant third.
Now, some analysts have started a countdown clock for Mayer. How much time before anxious investors question the future of Yahoo? Some estimate that Mayer has at least a year left. Some say two. Scrutiny of Mayer’s performance is expected to increase after Yahoo spins off its Alibaba shares into a separate business in the fourth quarter.
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With time growing short, Mayer’s options are dwindling, but analysts point to a few that could truly shake up Yahoo.
Acquire more companies: The latest strategy at Yahoo is to grow through mobile, social, video services and promoted content. The company has acquired businesses to boost technology and talent in these categories.
Some analysts believe Yahoo can afford to spend even more to snap up companies. Possible acquisition targets: customer review site Yelp, news aggregation app Flipboard or online video platform Hulu, said Robert Peck, an analyst with SunTrust Robinson Humphrey.
“All three of those would play to key strategies,” Peck said.
Peck said that so far, Yahoo’s mobile app performance has been a mixed bag. Despite app updates, the company hasn’t seen a significant jump in downloads, he said. Yahoo’s new regional marketing campaign attempts to drum up interest in its mobile offerings — but some marketers say the ads aren’t effective enough to lure people to Yahoo again.
Yahoo still lags in mobile revenue compared with competitors like Facebook, bringing in $130 in monthly mobile revenue per 1,000 active users in the first quarter of 2015, according to SunTrust Robinson Humphrey. Facebook brought in five times that amount, the investment firm said.
Get out of — not into — mobile search: Mayer is steering Yahoo to create its own technology that would power searches on mobile phones, using context and location to bring up the best content. And Yahoo has acquired some mobile-related startups, including Aviate, which personalizes smartphones’ home screens, for a rumored $80 million.
“With more oriented search results, rather than endless blue links, we believe we can build a better, more intuitive experience,” Mayer said in a recent earnings call.
But Peck says Mayer could drop this strategy. It can be costly to build expertise in this area and to compete against Google and Microsoft for talented engineers, he said. “It’s a talent problem and a cost problem,” Peck said.
Yahoo could team up with Google or Microsoft on mobile search, and use the savings to build original media content tha would attract people to Yahoo sites, he said.
Other analysts say that Mayer made the right decision to invest in mobile search. An ultimate coup, according to this camp, would be to land a deal with Apple to power search on its devices.
Lay off staff and lower stock-based pay: Under Mayer’s leadership, Yahoo has reduced its workforce 31 percent in the last three years, to 10,970 full-time employees and 780 contractors. But some analysts say she should trim even further.
“I don’t know if Yahoo necessarily needs such a large employee base to run the operation,” said Neil Doshi, senior analyst with Mizuho Securities. Yahoo is spread thin and needs to focus on core areas like finance, sports, news and e-mail, Doshi said. That would allow it “to become more nimble and more focused,” he added.
An analysis from SunTrust Robinson Humphrey showed that Yahoo may be giving employees too much in stock-based pay when factoring in its revenue. Yahoo’s stock-based compensation was $460 million, about 12 percent of its net adjusted revenue in 2014, the investment firm said. Google’s stock-based pay represents just 6 percent of its net adjusted revenue, SunTrust Robinson Humphrey said.
And the amount of revenue per employee at Yahoo is much lower than its competitors. Yahoo made $320,000 per employee in 2014, compared with Google’s roughly $1 million per employee.
Sell Yahoo: Yahoo may look to be bought by a private-equity firm, or go private after it deals with its shares in Alibaba and Yahoo Japan, analysts said. Taking the company private would allow it to focus on its business without having to answer to investors, said Patrick Moorhead, president of Moor Insights & Strategy.
It’s also possible that a network like Verizon or Comcast would buy Yahoo for its content, he added.
For now, Mayer seems committed to her original playbook, or what she calls the “virtuous cycle,” a turnaround process that builds on mobile and could take years. There were some bright spots in the company’s latest earnings report. Yahoo beat analysts’ expectations with revenue, and its display ad business showed the most growth since 2010.
“As I said before, with the right people, we will build great products,” Mayer said in a call with investors. “Those products will drive increased traffic, leading to greater advertiser interest and demand, and ultimately revenue.”
But analysts are still questioning the company’s profitability. SunTrust Robinson Humphrey estimates that Yahoo’s 2015 adjusted core earnings before interests, taxes, depreciation and amortization — seen as a key factor in a company’s health — is worth only about one-third of its value in 2012.
And right now, investors are focused on whether the spin-off of the Alibaba shares will go through. Then they’ll start to think about what remains of Yahoo, analysts said.
“At that point, you can see investors get a little more agitated,” Peck said.
Date: July 25, 2015