Yahoo! Ready to Shake Off Microsoft to Take on Search Market

In 2009, Yahoo!  (NASDAQ: YHOO  )  exited the search technology market and announced a partnership with Microsoft (NASDAQ: MSFT  ) . The deal gave Yahoo! a cheaper way to show advertisements to its web users, while Microsoft gained another entry point for its Bing search technology.

Yahoo! ready to lead search efforts
Reports from Re/code have Yahoo! creating two projects, known as "Fast Break" and "Curveball," to take on the search market. After four years of not controlling its own search technology, it appears newish CEO Marissa Mayer wants to see Yahoo! get a bigger piece of revenue from search and have more control over advertising rates. With the current partnership with Microsoft, Yahoo! has control over search experience, but not much else. With Yahoo!'s new projects expected to take three to four months, investors may be in for upside when a new search engine is revealed.

In its recent fourth quarter, Yahoo! saw paid search clicks increase 17% over the prior year. Display advertising volume also increased 3%. However, search revenue was down 4% to $464 million. For the full fiscal year, search revenue declined 8% to $1.74 billion. Excluding acquisitions, search revenue actually increased on the full year. Search is the second highest revenue driver for Yahoo!, behind display ($1.95 billion).

Taking on a giant
A new search engine from Yahoo! would compete directly with Microsoft, but more importantly, would take on the bigger giant Google (NASDAQ: GOOGL  ) . Google has absolutely dominated the search market in the U.S. and continues to be where advertisers go for targeted search traffic. ComScore reported that Google had 67.3% share in December, compared to 10.8% for Yahoo! and 18.2% for Microsoft. Google saw paid clicks rise 31% in the fourth quarter. Shares of Google hit all-time highs on the back of strong earnings and search growth.

Moving past Microsoft
The current deal between Yahoo! and Microsoft is guaranteed for five years. After the first five years, Yahoo! has the option to alter the sales arrangement and possibly change the revenue sharing. From the recent earnings report, investors see this: "Based on the terms of search agreement with Microsoft, Microsoft retains a revenue share of 12% of the net search revenue generated on Yahoo! properties and affiliate sites in transitioned markets." With its own search technology, Yahoo! would invest in capital, but would retain 100% of the profits, which could reward shareholders in the long term.

A move away from the Bing search platform could have a negative impact on Microsoft. However, with search making up a small portion of overall revenue, it may be in Microsoft's best interest to accept any deal given by Yahoo! to get out of the current 10-year terms. In the most recent fiscal quarter, Microsoft had total revenue of $24.5 billion. Of that total, only $1.8 billion came from the business unit containing search advertising and display advertising. That business unit (devices and consumer other) also contains resale, Windows stores, and Xbox Live revenue. Microsoft relies more heavily on its commercial licensing and devices and consumer licensing businesses.

Conclusion
Perhaps the biggest upcoming catalyst for Yahoo! will be the IPO of Alibaba, which is 24%-owned by Yahoo!. Evercore recently valued Alibaba at $150 billion, giving Yahoo! $22 per share in value related to its stake in the Chinese giant. When Alibaba shares go public, Yahoo! shares will likely get a lift. In 2013, shares of Yahoo! were up 101%. Yahoo! sports a market capitalization of around $39 billion, leaving the non-Alibaba stake worth a minimal amount.

Shares of Yahoo! are now down 6% so far this year. The company will likely end the year up if Alibaba shares go public. The company has plenty to offer investors with growth in search, revenue from acquisitions, and its stakes in Alibaba and Yahoo! Japan. Microsoft also has upside with a new CEO and possible split-ups of business units. Google, the undisputed search leader, continues to see shares trade at all-time highs. This recent rally might not provide as much upside as an investment in Yahoo!.

Get in on the cloud computing revolution
There are few things that Bill Gates fears. Cloud computing is one of them. It's a radical shift in technology that has early investors getting filthy rich, and we want you to join them. That's why we are highlighting three companies that could make investors like you rich. You've likely only heard of one of them, so be sure to click here to watch this shocking video presentation!


Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

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 February 11, 2014, at 4:53 PM, symbolset wrote:

    Very insightful. Thanks!

  • Report this Comment On February 12, 2014, at 12:24 AM, ipinsao wrote:

    When will yahoo or bing come up with their adsense alternative? As of now content providers will only be promoting google to increase their revenue. No incentive to promote yahoo or bing without this.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2834663, ~/Articles/ArticleHandler.aspx, 12/18/2014 12:32:46 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement