Yahoo! Losing Ground (YHOO)

By Douglas McIntyre | April 22, 2007 AAA

Yahoo! (Nasdaq: YHOO) has made several promises it has not been able to deliver. The latest one is that its new search technology would improve revenue. Not only was the first quarter a disappointment, but guidance did not indicate any great improvement.

Huge Audience.
Yahoo has more unique internet visitors worldwide than any other company save Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT). The company's revenue is substantial, at almost $1.7 billion last quarter, but this is only a 7% increase over the same quarter a year ago, it is no longer growing very fast. Google's top line is moving at a rate of better than 60% year-over-previous year. And, Yahoo's net income is dropping. Last quarter it fell 11% to $142 million.

Falling Behind Google
In March, research firm NetRatings said that Google's share of U.S. internet searches was 53.7%. Yahoo's was only 21.8%. To make matters worse, Google's search usage grew almost 32% over the same month last year. Yahoo's grew at half that pace.

Yahoo had hoped that Panama, its new internet-search advertising feature, would help it get market share in the lucrative text-advertising business that Google dominates. But, the financial results from both companies would indicate otherwise.

Yahoo should be unhappy with its position. Its constant disappointing of its investors has dropped the stock to $27.88, down from a 52-week high of just over $34. The shares are down over 15% in the last year.

Worse for Other Companies
Both Microsoft and AOL say that search is essential to their plans to be major web destinations. To keep their monthly page views and unique visitors, they need more than video, personal ads, financial sections, news and weather. The ability to search the internet for information is an essential starting point for many web users. But, Microsoft only has 10% of the U.S. search market and AOL's piece is about 6%.

Yahoo's falling share price may make it an attractive acquisition for either Microsoft or Time Warner (NYSE: TWX). The web company's market cap has dropped to under $38 billion. With a run rate of $7 billion in revenue, the company is still expensive, but it may be a strategic purchase for Microsoft, which could lift the price the world's largest software company would be willing to pay.

If Yahoo stays independent, it may be in business indefinitely. The company has no debt and still generates positive cash flow. But, it will be a distant second, and someday, even third-place player in the biggest game on the web. Ultimately, this does not make it a very compelling investment.

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