Rumors of Yahoo!'s (NASDAQ: YHOO) death may have been greatly exaggerated. While it is no secret that the company has been having trouble growing earnings over the last few years, recent positive news suggests that CEO Marissa Mayer's plans to turn the company around may finally be bearing fruit. The tech giant somehow managed to reclaim the number one spot in user traffic, beating out Google (GOOG 2.01%) as well as Facebook (FB 2.11%). While it remains to be seen how well Yahoo! can capitalize on this increased traffic, the stock's rock-bottom valuation could provide plenty of long-term upside.
Back in Pole Position
While no one really seems sure how they pulled it off, Yahoo! has, for the first time in a long time, achieved the number one spot in comScore's monthly web traffic ranking. While the score has some caveats, such as the fact that it only measures unique users and doesn't include mobile, the number baffled analysts and more or less everyone else, with Yahoo!'s figure of around 197 million unique users beating out Google's 192 million.
Some speculated that the results may have had something to do with Yahoo!'s acquisition of Tumblr, but comScore was quick to point out that these figures were not included in Yahoo!'s total. So, it seems as if Mayer's attempts to revitalize Yahoo!'s homepage, and focus on the core businesses such as email, finance information, and weather, is paying off, at least in terms of traffic. The question is how well the company will be able to monetize this traffic, which according to many may prove problematic.
It's All About Monetization
Having a lot of monthly users is all well and good, but that alone is not enough to guarantee a company's profitability. According to most analysts, Yahoo! simply isn't doing as good a job as the competition in growing its revenue, second-quarter sales excluding advertising commissions of $1.07 billion down 1% and missing expectations. Revenue growth in mobile seems particularly problematic.
Compare this to Google's performance. While they apparently attracted fewer unique visitors for July, Google managed to bring in revenue of around $11.1 billion excluding commissions. Consolidated revenue was up 19% year-over-year, although average cost-per-click is still in decline. Still the top dog in terms of digital advertising revenue, the company is expected to deliver around $38.83 billion in online advertising for the full year .
A key question for firms reliant on digital advertising is the degree to which mobile use can be monetized, something that Facebook's most recent report showed it was able to do. Mobile ads now account for 41% of total ad revenue, up from 30% in the previous quarter.
A key factor in Facebook's mobile success seems to be its effectiveness in targeting potential customers. COO Sheryl Sandberg was quoted as saying that: "The most important work we've done over the past year is around custom audiences." Expectations are highly strung for Facebook's third-quarter report, analysts calling for earnings of $0.18 per share versus $0.12 for the same period a year ago.
Valuations and Metrics
Yahoo!'s questionable performance over the last few years has left the stock trading at an absolute bargain, especially compared to the competition. The stock currently trades at only 7.63 times trailing earnings, versus Google's 25.07, and Facebook's lofty 187.06. While the competition is clearly outperforming Yahoo!, the stock does seem just a bit too cheap. The stock has a good return on equity of 31.55% and an excellent balance sheet, with only $49 million in debt and $2.63 billion in cash, leaving the company with plenty of money to continue its acquisition spree.
The Bottom Line
ComScore's most recent survey of web traffic paints an interesting picture of Yahoo!'s turnaround story. Clearly, some of the company's efforts have paid off in terms of monthly users, the website now once again in first place. Yet, many questions remain as to the company's ability to actually profit from this increase in users, as it has been struggling over the last few years to increase revenue. In any case, the competition seems to be doing a considerably better job of this. However, the news is certainly encouraging, and the stock has plenty of room to run considering its valuation.
