Yang-less Yahoo Inc. tempting suitors

KB run over by this punishing IT market. But there's hope in Yahoo and HP.

By Kevin Barker

The web's favourite problem child, Yahoo Inc., (YHOO.NASDAQ) is finally in play after the announced departure in January of founder Jerry Yang.

Last fall analysts described the company as 'beleagured, a mediocre hybrid,' and my personal favorite, 'a rudderless Internet hodgepodge'. Now they're hailing Yang's departure as the precursor to a sell-off of Yahoo's Asian assets and some kind of rebirth into something presumably more focused.

That may be, but I for one think a U.S. based web portal without Asian assets has a lot less growth potential, if any at all, even if it does have a lot more cash from the sale.

Focus is something the world's oldest web portal always seemed to lack, and that problem certainly hasn't gone away. Thematically, Yahoo was and is a new media company with ads and not much more. Has it struggled, unsuccesfully, to create a vision of what web surfers should see beyond the browser? Perhaps. But not very hard it seems. Yahoo the company is nothing more than the sum of its parts, and I suppose that is why I for one have always avoided it. It has never given me a cohesive, front-to-back customer experience. In fact I remember asking years ago what Yahoo actually did, and more importantly, how they made money. 'Ads', was the answer, '...tons and tons of ads'. Ten years later the answer is still the same.
But in the face of all the outside analysis, and in the interest of trying to make out where the company's future growth will come from, it's worth noting how Yahoo describes itself, which is thus, "... the premier digital media company, creating deeply personal digital experiences that keep more than half a billion people connected to what matters most to them." That's a mouthful, and there's more, "... Yahoo's unique combination of science plus art connects advertisers to the consumers who build their businesses." In other words, Yahoo has a soul. No one can really say that about Google.

It is common for big companies that fail to progress or grow or change yet remain profitable to eventually fall into stronger hands, or break up. When Google came along I thought Yahoo would merely wither on the vine, and I think any prospective suitor has probably had an innate fear of Yahoo's revenue simply falling off a cliff someday. So far it hasn't: In 2010 it had net income of $1.2 billion on revenues of $6.3 billion. Nor is that likely to diminish, since much of what Yahoo calls marketing revenues, essentially Internet advertising, comes by way of the newspaper channels, which have stagnated in recent years. There is no reason to believe that inverse growth ratio of print to Internet is likely to change unless and until the dailies 'get religion' on the new media and wise up.

But something wasn't right with Yahoo late last year. In July they guided their earnings below analyst forecasts, prompting First Call to drop their estimates for the quarter by 41% (-16.9% for the year), versus a 13% increase for the sector. Then there's that paltry ROE of 9.8% over the last year against the industry average of 34.28%. Not good. Of the 26 analysts rating Yahoo stock, more than half recommend a hold.
What is disturbing is that Yahoo's cost of doing business year -over- year is reportedly growing faster than the revenues, and that stems no doubt from the cost of competing in those lucrative foreign markets, making expensive - and questionable - acquisitions.
All that has to change, and I suspect the board has to get its head around change in general. Develop new products and grow, and find the right person or people to stickhandle it, or stay the same and continue to lose ground.
The good news for investors is the YHOO chart -- which suggests a probable short term price gain of a couple of bucks, to $16 1/2 or $17 1/2 per share. Whether the stock will grow legs beyond that depends on whether or not more than one of its multi billion dollar competitors decides the company is worth fighting over.