Yahoo!'s investment in Alibaba has been a major victory for the company's fortunes. Alibaba's robust revenue growth and earnings will drive more upside on Yahoo!'s stock price. As Yahoo! focuses on ramping up growth in its core business, the equity stake in Alibaba protects a large part of any downside risk in the company's shares.

Core Yahoo! is improving
In the last quarter, Yahoo!'s topline revenues declined 1% year-over-year to $1.13 billion. The company is investing heavily in developing new products, and has ramped up its sales and marketing force in the last quarter -- and this incremental investment has led to a decline in operating income. Yahoo's cash and marketable securities stood at $4.6 billion at the end of the last quarter. The company is returning cash to shareholders, as evidenced by the $450 million the company used to buy back 12 million shares in 1Q14. 

Yahoo!'s display advertising business saw flat year-over-year revenues at $453 million in the last quarter. However, the number of ads sold increased 7% year-over-year, even while the price per ad decreased 5%. Yahoo! also is taking steps to ramp up its display products and properties. The company has previously stated its intentions to develop original content for its global user base of more than 800 million, so that might aid display ad revenues in the near-term. So going forward, Yahoo! can generate incremental dollars from ad-supported video like other online video platforms, including Hulu and YouTube.

In addition, Tumblr is monetizing its growing user base with sponsored posts as well. In the last quarter, Tumblr's mobile user base surged 71% year-over-year, and almost 60% of its daily users are coming from mobile devices, so Tumblr should aid Yahoo's mobile monetization plans in the future. 

Mobile traffic is growing
Yahoo!'s mobile traffic has surged to more than 430 million users, a healthy and notable increase of 30% year-over-year. And as a result, more than 50% of Yahoo!'s total monthly visitors are coming from mobile devices. 

The company's Search ad revenues increased 5% year-over-year to $445 million driven by a 6% increase in paid clicks and an 8% increase in price-per-click. However, Yahoo's search partnership with Microsoft (NASDAQ:MSFT) will change terms in Q2; under the new terms, Microsoft's revenue guarantee will end, and that could have a negative effect on the company's future search revenues. In recent years, Microsoft's Bing search platform has been steadily gaining market share at the expense of Yahoo!. According to comScore, Microsoft's market share in the U.S. stood at 18.4%, whereas Yahoo's search engine market share was 10.3%. 

However, Yahoo! has seen stellar growth in search volume from mobile devices. This is an encouraging sign for the company. In addition, Yahoo! struck a deal with online business directory platform Yelp, under which users will get to see photos, reviews, ratings, and business information straight from Yelp when users search on Yahoo's search engine. Yahoo's revenues from mobile search and display have been robust, and are likely to notch up higher in the future. 

Alibaba earnings driving bottom line
In the last quarter, 96% of Yahoo!'s net income has flown in from its equity investment holdings in Yahoo! Japan and Alibaba, even though the company's operating income went through a notable decline. Investors and analysts alike have been closely eyeing the financial performance of Alibaba, which saw accelerating revenue growth in the last quarter. 

Alibaba's revenues increased 66% year-over-year to $3.1 billion, and its net income increased 110% year-over-year to $1.36 billion. With such fantastic growth numbers, Alibaba has gigantic prospects when it hits the public markets. Sell-side analysts have previously stated that Alibaba can be a $150 billion company, but now, after accelerating revenue and earnings, estimates have move upwards to as much as $200 billion.

Going forward
Yahoo! revenue guidance for Q2 2014 stood at $1.12 billion-$1.16 billion, which is essentially flat on a year-over-year basis. But as long as Alibaba continues to outperform on its top and bottom line growth, Yahoo!'s stock price should do well. Alibaba provides a large margin of safety for Yahoo! investors. In addition, Yahoo has invested in simplifying its online advertising platform for marketers, and this should help core Yahoo!'s results to improve in the future as well. An Alibaba IPO in the near-term still remains the main catalyst for future upside in Yahoo's stock price.