Yahoo (Nasdaq:YHOO) Chief Executive Marissa Mayer, one of the most powerful women in business, has recently claimed the company's core display advertising business is starting to show signs of a turnaround. Unfortunately, there may be less to this achievement than meets the eye.

When fees Yahoo paid to partners are excluded - the company's preferred metric - revenue from ad sales, which accounts for about 40% of the company's sales, rose just 2% to $409 million. Though Mayer noted during a recent earnings conference call that the performance of the advertising business and Yahoo's search business represented "an important shift" for the Internet media company, that's a huge exaggeration. As many have said before, one quarter doesn't make a trend and Yahoo has seen many consecutive quarters of declines in its display-ad business.

Nonetheless, Wall Street is willing to give Yahoo some slack because of the potential payoff from the Alibaba Group IPO. Yahoo owns about a 24% stake in the Chinese Internet company and could stand to reap a $19 billion windfall after the Hangzhou-based company goes public, whenever that happens. Wall Street, though, is starting to press Mayer for details of what's going to happen after the year's most hotly anticipated deal finally occurs and aren't sure if Mayer can back up her words with actions.

The Street Not Totally Sold

Shares of Yahoo climbed after the positive news but the bump was short-lived; YHOO has settled down to a level close to its pre-earnings price. On a price-to-earnings basis, Yahoo trades at a ratio of 29, a discount to rival AOL Inc. (NYSE:AOL), whose valuation is about 37. Yahoo currently trades at a 21% discount to its $42.22 average 52-week price target. The depressed valuation indicates that Wall Street isn't totally sold on Mayer's turnaround plan, any Alibaba windfall notwithstanding. Investors shouldn't add the shares to their portfolio yet until more concrete signs of improvement emerge.

Investors have reason to be skeptical about Mayer's claims about display advertising. She hired Henrique De Castro, a former Google Inc. (Nasdaq:GOOG) colleague, as chief operating officer last year. By all accounts De Castro's tenure was a disaster. The company failed to forge alliances with Madison Avenue and Yahoo's revenue growth withered. Mayer admitted to Wall Street that hiring De Castro was a mistake, and a costly one at that. His severance package reportedly was $58 million, a shockingly high figure.

To make matters worse, Yahoo's share of the display-advertising market has been slipping for years. Marketers spend more money with Google, Facebook, Inc. (Nasdaq:FB) and Microsoft Corp. (Nasdaq:MSFT). As of the end of last year, eMarketer pegged Yahoo's share at 5.8%, well behind Google, which had 39%. Under Mayer, Yahoo has made huge bets on original content, bringing media personalities such as broadcaster Katie Couric and former New York Times columnist David Pogue on board. Meanwhile, it has spent $1 billion on the popular blogging site Tumblr and has revamped many of its features such as the photo-sharing site Flickr and has added new features such as the popular app Summly.

Yahoo managed to sell 7% more display ads in the quarter, more than double the 3% increase it saw in the fourth quarter. However, there is a huge caveat to that statistic: the price per ad fell 5%. Though that represents a sales improvement over previous quarters, it is a worrisome trend nonetheless. It shows that advertisers are scaling back spending with Yahoo and ratcheting it up with rivals such as Facebook, which recently reported a blowout quarter. Unfortunately for Sunnyvale, Calif.-based company, display ads are like vinyl records for marketers: relics of a bygone era. Advertisers are shifting spending to more targeted forms of advertising such as search and sponsorships. Moreover, those who buy display advertisements aren't willing to pay much for them and thanks to the growth of programmatic sales, they don't have to.

Programmatic ad sales are automated auctions that match buyers are sellers. For companies such as Yahoo, they are a mixed blessing. One the one hand, they move inventory. Unfortunately, they move these ads at rock-bottom prices. Programmatic ad sales are expected to surge in the coming years, rising from $12 billion in 2012 to $32.6 billion in 2017, according to Magna Global.

The Bottom Line

Even though Mayer has talked a good game about the new Yahoo, she still needs to improve the company's core display-ad business for analysts to believe her turnaround is for real. And with ad rates falling, the clock is ticking on reshaping that business.

--Jonathan Berr does not own shares of the aforementioned stocks.

Related Articles
  1. Entrepreneurship

    10 Ways You Can Make Money as a Blogger

    Obtain helpful information about the top 10 techniques that professional bloggers utilize to generate their incomes from blogging.
  2. Markets

    Impacts of a 1-Star Yelp Review on a Company

    Learn how a 1-star Yelp review impacts the rating of a small business and how Yelp users interpret 1-star reviews given by customers.
  3. Entrepreneurship

    How to Pick a Winning Name for Your Business

    Many entrepreneurs are big picture people and have a hard time choosing a company name. Here are two major strategies for naming a business.
  4. Fundamental Analysis

    Yahoo, Google Back Together in Search Deal

    Google and Yahoo have signed a search deal yet again. The question is whether this one will stick.
  5. Markets

    The Biggest Companies in Silicon Valley

    Understand what types of companies are the most successful in Silicon Valley. Learn about the top six largest Silicon Valley companies by market cap.
  6. Investing News

    How Facebook Leverages Your Posts to Swift Growth

    How Facebook has monetized your personal info into an economic powerhouse with robust growth.
  7. Stock Analysis

    4 Ways Amazon Threatens Google's Future

    Learn how Amazon products like Amazon Prime Now, Amazon Echo, and Amazon Cloud Drive compete with Google products and pose a financial threat to Google.
  8. Markets

    Will YouTube Ever Overtake Television?

    YouTube has started expanding its content to include original series, but that doesn't mean it will become the primary source of video entertainment.
  9. Investing

    How Your Startup Can Do Marketing/PR On The Cheap

    Cash-strapped startups often need to stretch their finances. We show how you can engage in inexpensive marketing and PR efforts.
  10. Retirement

    Is Google Stock Suitable for Your IRA or Roth IRA?

    Discover if Google is an appropriate investment for an IRA and whether it is more appropriate for a traditional IRA or a Roth IRA.
  1. How has Google's operations strayed from its original mission statement?

    Google's (GOOG) mission statement has been the same since its inception in 1998: "Organize the world's information and make ... Read Full Answer >>
  2. What are the main benchmarks that track the performance of the Internet sector?

    The main benchmarks that track the performance of the Internet sector are the Nasdaq Composite Index, the First Trust Dow ... Read Full Answer >>
  3. What level of annual growth is common for companies in the Internet sector?

    The Internet services sector consists of a diverse group of companies that exhibit strong growth potential. Investors often ... Read Full Answer >>
  4. What developed countries have the greatest exposure to the Internet sector?

    The Internet sector permeates all developed economies. The McKinsey Global Institute estimates that Internet companies constitute ... Read Full Answer >>
  5. What are the similarities between product differentiation and product positioning?

    Product differentiation and product positioning are important elements in a marketing plan, and most marketing strategies ... Read Full Answer >>
  6. What is the average return on equity for a company in the internet sector?

    The Internet sector includes Internet information providers, Internet service providers, and Internet software and services, ... Read Full Answer >>

You May Also Like

Trading Center