Henry Blodget Can't Save Yahoo!

Henry Blodget almost had me convinced today was April 1. His letter to Yahoo! (Nasdaq: YHOO  ) CEO Carol Bartz is that absurd. From the letter:

If this deal is going to work, the way it's going to have to happen is that you're going to have to buy Business Insider and then promote me to president of Yahoo. The good news is that I think Business Insider would be an excellent acquisition for Yahoo ... Once we plug Business Insider into Yahoo Finance, our traffic and revenue will explode, and Yahoo Finance's BI will become the world's most influential business publication. And buying us won't set you back much, especially relative to your massive cash hoard.

Translation: "Come on, Carol. AOL (NYSE: AOL  ) just spent $30 million to acquire TechCrunch, and my Business Insider blog network is worth at least that much!"

Tongue, meet cheek
To be fair, there's more than a clever pitch at work here. Blodget also makes some important points about Yahoo!'s advantages and weaknesses. He touches on two areas in particular: communications and content. Let's review.

Communications: Blodget argues that Yahoo! Mail has slipped in features and lost significant ground to Google (Nasdaq: GOOG  ) , but that it's also not too late to right this wrong.

"Restoring Yahoo Mail, Messenger, et al, to their former glory will require immediately building the best integrated communications suite available -- one that integrates contacts, email, voice, instant-messaging, AND external services like Twitter and Facebook," Blodget writes.

He goes on to argue in favor of an AOL-Yahoo! merger, writing that combining the two would add scale and allow technology investments to have greater impact. (Fair point.)

My take: Much as I admire Blodget's pluck, AOL stinks at communications. Sure, AIM is a widely used service, but most techies I know already use the sort of integrated messaging platforms Blodget describes as ideal. Meebo and Digsby, for example. Plenty more use Gmail because it links together voice, chat, email, RSS, and productivity in a single screen.

Yep, that's my Gmail screen. Notice the links to other services at the top of the page.

Yahoo! hasn't challenged Microsoft (Nasdaq: MSFT  ) in productivity apps the way Apple (Nasdaq: AAPL  ) and Google have. And don't tell me this doesn't matter; communications platforms that don't offer either entertainment (i.e., Facebook), or productivity (i.e., Gmail) are worthless.

Content: Blodget calls Yahoo!'s content opportunity "extraordinary." To a degree, this is self-serving. He's arguing for a buyout of Business Insider, after all. But he's also not wrong. Facebook is the rare site that beats Yahoo! at the game of engaging visitors once they show up.

"Almost every traditional content production business on the planet is getting hammered by the world's shift to digital. It is beyond disappointing, therefore, that Yahoo has not moved more aggressively to amass control of the global digital content business," Blodget writes.

He also (rightly) points out that Yahoo! has the cash to make these purchases. The once and, if Blodget has his way, future dot-com king has produced more than $600 million in free cash flow over the past year.

My take: There are a couple of problems with Blodget's thesis here. First, Yahoo! has a lousy history when it comes to making investments. For most of the past five years, its returns on capital have mostly fallen.

Second, while it's clear from iPad usage data that digital holds promise, we've yet to see content heavies such as the New York Times (NYSE: NYT  ) enjoy a digital revenue renaissance. E-readers aren't remaking the content business as fast as we'd like.

We've seen this story before, and it's ended badly every time
Give Blodget double credit for writing a cogent thesis with a touch of humor. It's exactly the sort of thing we Fools like to see. But let's also not pretend that Yahoo! is in any position to catch or surpass Google in communications, and that content acquisition is part of some sort of cure-all. The Huffington Post may be good, but it's not that good.

And let's face it, we've seen Yahoo! acquire and aggregate content creators before. What's come of the strategy? Progressively lower returns on capital, followed by a widespread loss of shareholder wealth.

Now it's your turn to weigh in. Can anyone return Yahoo! to its former glory? Share your thoughts in the comments box below, and if you're interested in Yahoo!, click here to add it to your Foolish watch list.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Apple is a Motley Fool Stock Advisor selection. Google is a Motley Fool Rule Breakers recommendation. Google and Microsoft are Motley Fool Inside Value picks. Motley Fool Options has recommended subscribers open a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool owns shares of Apple, Google, and Microsoft and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is literally at a loss for words.


Read/Post Comments (3) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 04, 2010, at 5:06 PM, TigerPack1 wrote:

    Yahoo! is not exactly hurting... They will surpass Google next year in net profit margin, as their reported GAAP earnings and non-GAAP free cash flow are growing nicely, even during a recession. They have almost no liabilities, $4 billion in cash, and plenty of ownership positions in fast growing internet properties worldwide.

    I believe they should monetize the Alibaba stake, which is worth about half of Yahoo's stock market cap by most Wall Street estimates, and invest in more content. Acquiring AOL as a start, but they could own half the "content" on the web and solidify their click ad business leadership position they have as "the" ultimate new age, newspaper/media company on the web, if they cash in the Alibaba stake worth $7-9 billion.

    Stripping out the Alibaba value and cash on the balance sheet, Yahoo! owners at $14 a share are getting about 10% in free cash flow on their money, which should grow 15%-20% yearly the next 5 years, given slow economic growth and some inflation. They are buying back shares at less than 2x tangible book value, returning earnings to shareholders, and compounding future positive returns per remaining ownership unit.

    Yahoo! is a $50 stock in several years for a variety of reasons, if managed properly. Ichan and Soros agree with me, and own large stakes in this company, as do I. I plan on buying considerably more Yahoo! shares if the market dives in October also.

    Yahoo! is very unloved by Wall Street and investors currently, and that is the reason it is so cheap. Stories like this may help to keep Yahoo's stock price low another few weeks. Thank you for the help. My future retirement years, daughter's private school education and wife's shopping sprees owe you one!

    By the way, I expect Microsoft to bid for Yahoo! again before the spring of 2011. I suspect a low-$20 number per share will be the opening salvo.

    -TigerPack

  • Report this Comment On October 04, 2010, at 5:23 PM, jacobandersen72 wrote:

    i completely disagree with Tim Beyers and obviously analyst Blodget does too. Try to be a bit positive Tim. 600,000,000 members (more than facebook) LOVE YAHOO. LOVE IT. have been using it for 15 years or so. its our home page. its our finance site. its our search and our 2nd search after google. its our email. yep. i have gmail but i prefer to use and do use yahoo.

    yahoo is approaching $1 billion in net income at home in the USA. 1 billion members wont be too far away. you know the deal with CHINA. YAHOO essentially owns CHINA on the internet thru Alibaba and Yahoo Japan. Yahoo India is also making inroads.

    amazing how many people want to bash yahoo. i cant see living in a google world and anyone over 24 years of age knows that facebook is not going to be your email / adult site.

    yahoo wins. see you at $20. be more positive tim and buy a few shares.

    conclusion: downside is limited and upside might even be a double.

    thank you

    ps. i own shares / i am up / i will hold them for a larger gain.

  • Report this Comment On October 05, 2010, at 9:28 AM, CyborgTrader wrote:

    Yahoo is a great property. Like Jacob, it's my home page. I can customize my content layout, I don't have to use my browser's drop down menu for bookmarks; instead I have all my bookmarks organized by category on my homepage. I have stock quotes for easy access, news, sports, and whatever, all laid out "MY WAY"! This is all on one page, thus making it very efficient and I can quickly access to what I need.

    Facebook is good for games and socializing with friends, but otherwise pretty boring. I wouldn't trust sending an important message through FB. Yahoo management like Google, Microsoft, all missed the social network revolution. Yahoo games along with being able to chat real-time without leaving your game is extraordinary, but they didn't capitalize on it.

    Yahoo and Microsoft had social networks before FB was born, but their layouts are lousy and should be integrated into it a "clean" interface.

    Carly, give me a consultant fee and a young team, I can spank FB and send it to be with no dessert.

    Long: Yahoo Calls and trade the stock.

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