Yahoo! Takes One Small Step

The concerns surrounding Yahoo! (Nasdaq: YHOO  ) are many, and varied. Among the many hurdles the company faces are the July appointment of its third CEO in a year, consternation over several failed attempts to sell part of its Alibaba stake, and, most telling, the continual loss of online advertising revenue to the likes of Google (Nasdaq: GOOG  ) and Facebook (Nasdaq: FB  ) , among others.

So it would be a huge understatement to say the response from investors following Yahoo!'s after-hours earnings announcement on Oct. 22 was encouraging. Yet for long-suffering shareholders, as heartwarming as the jump in the stock price was following the announcement, the continuation of the upward trend is even more telling. As you know, a quick post-earnings pop in share price is often emotion-based, lacking the legs needed to maintain the positive momentum. Not so with Yahoo!, for which there are legitimate reasons for investor optimism.

The results
Revenue results for Yahoo!'s Q3 include a whopping $7.6 billion (pre-tax) from the Alibaba deal. A tad over $6 billion of the Alibaba proceeds are in cash (the balance in preferred stock), making for an impressive balance sheet. Naturally, the provision for taxes jumped significantly, negating some of the balance-sheet growth, but the infusion of the Alibaba funds is undeniably good. But in some respects, the balance-sheet boost is overshadowed by the delay Yahoo! experienced in finally getting the deal done.

However, even removing the impact of Yahoo!'s asset sale and the "it's about dang time" sentiment, there are reasons for optimism. Guarded optimism, but optimism nonetheless.

Online display advertising, Yahoo!'s bread and butter, remained flat. Not ideal, of course, but as CEO Marissa Mayer put it, "Yahoo! had a solid third quarter, and we are encouraged by the stabilization in search and display revenue." Given that the loss in market share for its primary business line is clearly an overriding concern, stability at this stage of a Yahoo! turnaround is a definitive step in the right direction.

Yahoo!'s non-GAAP earnings, removing the "Alibaba Effect," improved to $0.35 a share on $1.09 billion in revenues, versus $0.21 a share from $1.07 billion in revenues a year earlier. Both earnings and revenues beat expectations, which were for Yahoo! to earn $0.25 a share on $1.08 billion in revenues. Those are solid results for a company many had written off in the past year.

Analysts seem to be taking Yahoo!'s Q3 results to heart, just as many investors are. Recent upgrades from Susquehanna, Nomura, and Cantor Fitzgerald are certainly positive signs. Of course, those upgrades are somewhat tempered (I know, a recurring theme) by the fact that 20 of the 26 analysts following Yahoo! maintain a "hold" rating. But take heart, Yahoo! aficionados: As you know, it's been worse.

Mayer continues to put her stamp on Yahoo!, having named several key executives since her arrival. As noted in the recent earnings announcement, Yahoo! added a new COO, CFO, CMO, and EVP, among others. As is the case with Mayer, it's too early to say what impact the new Yahoo! additions will have going forward, but the changes were certainly needed.

Concerns remain
Competition remains the biggest roadblock to a full-blown Yahoo! turnaround. In addition to the competition from Google and Facebook, AOL (NYSE: AOL  ) continues its efforts to reinvent itself. As it shifts to a destination portal, providing users with more and more content, AOL will heighten the competition for advertising revenues.

The lack of guidance for Yahoo!'s Q4 and beyond is also disconcerting for analysts and investors, and rightfully so. Sharing financial expectations is widely seen as confirmation of a company -- and a management team -- that has a firm grasp on its business lines and objectives going forward. Now, it's reasonable to assume that with a mere three months under her belt at Yahoo!, Mayer should be given a bit of leeway. Still, assuring Yahoo! shareholders that Mayer and the management team have at least a sense of what's coming shouldn't be too much to ask, should it?

Yahoo! isn't out of the woods, not by a long shot. But you have to admit, Q3 results have certainly made things interesting, enough to make Yahoo! worth watching if you're in search of a high-risk, high-reward alternative for your portfolio. Remember, even the longest of journeys begins with taking that first step.

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Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google and has options on Facebook. Motley Fool newsletter services recommend Facebook, Google, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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