Is This Another Flash in the Pan, or a Real Turnaround for Yahoo!?

Shares of Yahoo! (Nasdaq: YHOO  ) hit a 52-week high on Wednesday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
With a 52-week range of just $2.45, Yahoo! is about as volatile as Johnson & Johnson these days. Nonetheless, the search engine provider sparked Wall Street's interest yesterday following a better-than-expected third-quarter earnings report.

Many pundits have placed Yahoo!'s recent success on new CEO Marissa Mayer, who came over from Google (Nasdaq: GOOG  ) just over three months ago. However, I'd like to point out that much of Yahoo!'s current-quarter game plan was already in place long before Mayer took the helm. For the quarter, Yahoo! reported a 2% increase in revenue, but a much more impressive 66% increase in EPS to $0.35 from $0.21 in the previous year. EPS results crushed Wall Street's expectations by a clean 40%. Furthermore, Yahoo!'s display ad revenue appears to finally be stabilizing, with revenue flat when excluding traffic acquisition costs.

What really excited shareholders was Mayer's strategy for Yahoo! moving forward. Her plan entails the company focusing more in its search engine in order to drive customer traffic, investing heavily in mobile and tablet growth, and looking to make small acquisitions of $100 million or less. Yahoo! is suddenly very cash-rich following its Alibaba share repurchase agreement, sporting $9.4 billion in cash (of which $2.5 billion will go to pay taxes), and can afford these acquisitions with relative ease. In addition, Yahoo! has pledged to return 85% of its net Alibaba gains (about $3.65 billion) in the form of share buybacks.

What could derail Yahoo!?
There are still a lot of unanswered questions that Mayer and Yahoo! will have to contend with before investors like me will trust this rally.

For one, Yahoo! has been losing search engine and advertising market share to Google and Microsoft's (Nasdaq: MSFT  ) Bing for years. Yahoo! has pledged on paper numerous times that it'll focus on regaining its lost market share, yet it continues to fall further behind. Until I see actual results in this column, it's just more hot air from Yahoo! management.

Yahoo!'s move into mobile is also bound to be crowded. Not only is Yahoo! contending with the current leader of mobile advertising in Google, but Facebook (Nasdaq: FB  ) recently unveiled its mobile plans to the delight of shareholders, and AOL (NYSE: AOL  ) is attempting to reinvent itself by centralizing its search areas through acquisitions (i.e., The Huffington Post) and focusing on mobile content. A year ago I'd have hardly called Facebook or AOL any cause for concern. However, AOL's recent patent sale to Microsoft, as well as Facebook's cash-yielding IPO, make them both formidable mobile competitors ripe with a lot of cash.

Finally, history is not on Yahoo!'s side. As I mentioned above, Yahoo! has written its turnaround plan on parchment each year for the past five and has failed to execute on its key strategies each time. Mayer may have the answers that Yahoo!'s previous CEOs did not, but I'm not holding my breath.

What's next
Now for the $64,000 question: What's next for Yahoo!? The answer depends on its ability to execute on Mayer's key points: focusing on its search engine, investing in mobile, and making small acquisitions.

Our very own CAPS community gives the company a two-star rating (out of five), with 79.6% of members expecting Yahoo! to outperform. As you can gather from my skepticism, I'm part of the 20% that currently maintains an underperform CAPScall on Yahoo!. That selection is up by four points at the moment, and Yahoo! hasn't given me any reason to end that underperform call (even given the better-than-expected report).

As I stated above, Yahoo! has made countless promises and suggestions as to how it's going to bring in new advertising dollars and increase portal usage, yet all have failed to produce results. Mayer's young and fresh view from powerhouse Google may shed different light, but I'm not sold just yet. Yahoo! has failed to produce any meaningful growth in more than five years and, if not for its cash pile and Alibaba divestment, should probably be trading much lower. I admit I'm a little less pessimistic after this report than I previously was, but Yahoo!'s history dictates a skeptic stance be taken by investors -- and that's exactly what I'm doing!

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Johnson & Johnson, Google, Microsoft, and Facebook, as well as Facebook calls. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson, Google, and Facebook, as well as creating a synthetic covered call position in Microsoft. 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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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 25, 2012, at 7:20 PM, plange01 wrote:

    yahoo shareholders are waiting for the proceeds from the sale of alibaba to be distributed to them or mayers will land in the dumpster with the rest of yahoo's failed ceo's

  • Report this Comment On October 25, 2012, at 9:21 PM, TMFUltraLong wrote:

    plange01,

    Those proceeds are going toward stock buybacks as far as I have read. Shareholders won't be seeing a dime.

    TMFUltraLong

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