The short version is a press release. The long version is an investor’s presentation – 35 pages in .pdf format – that Yahoo filed with the Securities and Exchange Commission. Both versions present a much rosier future for the struggling search engine than most analysts would have you believe.
Can you imagine a Yahoo that doubles its cash flow and increases its revenues by more than 50 percent in just three years? Without Microsoft buying it out? Apparently Yang can. I have certainly been wrong before but, not to put too fine a point on it, I’d like some of whatever Jerry’s having.
How exactly does Yahoo propose to accomplish this? That extra money is not going to come from search advertising, where Google leads the market. Yahoo projects that it will come from display advertising, including banners and videos. While this area has traditionally been one of Yahoo’s strengths, it has lately proved vulnerable to other web publishers, most notably social networking sites such as MySpace. Yahoo’s plan calls for growing faster than the market in an effort to take back lost share. That could work – if it doesn’t lose any more search advertising to Google.
But to achieve this goal, Yahoo needs to pull some very ambitious numbers. It expects to sell $8.8 billion in online advertising in 2010, an increase of $5.1 billion over 2008. Yahoo thinks it will pull this off by increasing its advertising sales by 11 percent in 2008 – and 25 percent in both 2009 and 2010. It is almost as if Yahoo is saying “What recession? What’s all this talk about a bubble bursting? That doesn’t apply to us!”
To call Yahoo’s presentation optimistic is almost an understatement. One presentation slide flatly states that “We believe our growth and profitability prospects are not fully appreciated by the public market.” Tell that to the 1,100 employees Yahoo laid off earlier this year!
Yahoo did focus fairly strongly on its Asian position in the presentation, as if to counterbalance the latest economic news and indications of the US entering a recession. The company holds a 33 percent stake in Yahoo Japan, which dominates that market. It also holds a 39 percent stake in Alibaba, a Chinese business-to-business site. On the other hand, rumors are circulating from no less of a source than Forbes that Alibaba’s leadership wants to buy Yahoo’s stake back in order to keep the company independent if Yahoo is bought out by Microsoft.
Yahoo has other numbers working for it, ones that pale only in the shadow of Google. Just looking at the large number of visitors it receives boggles the mind: 305 million unique monthly users of its home page and 262 million unique monthly users of Yahoo Mail. This doesn’t even count all the users of Yahoo’s other properties, like Yahoo Finance.
Yahoo also emphasized a number of very new social media projects. In particular, it pointed to social news site Yahoo Buzz, which I reviewed recently. It also mentioned a mobile service that has yet to launch, Yahoo OneConnect. Apparently it expects these projects to really take off.
I wish I could be more optimistic about Yahoo’s ability with social web projects, especially since I think they really do “get” Web 2.0 there. But in all honesty, Yahoo’s performance in this area has been haphazard. Yahoo Groups remains very popular, and Yahoo Buzz looks like another winner. On the other hand, there’s Yahoo 360, which never quite took off. And Yahoo Mash, launched in September 2007, is still in invite-only beta mode, and seems to be flying under most people’s radar. Some observers believe that Yahoo Mash was created to out-Facebook Facebook when Yahoo failed to purchase the massively popular social site; a lack of buzz in this case is not a good sign for the future.
I was tempted to call this section “You have to be kidding,” but the truth is, I like Yahoo enough to give it the benefit of the doubt. And I’m not convinced that a Microsoft buyout would be the answer to the search engine’s woes – or necessarily a good thing for consumers. But I’m not exactly a market analyst, so let me quote those who are.
Ross Sandler, an analyst with RBC Capital Markets, isn’t buying Yahoo’s optimism. “Judging by recent history, we remain skeptical of Yahoo’s ability to execute smoothly against this plan,” he wrote in a research note. “If the overall economy and the online advertising space were in a healthier place right now, we would have more confidence.” Still, he did raise his price target for Yahoo’s stock from $24 to $32.
Clay Moran, of Stanford Group Company, meanwhile, thinks the presentation’s real audience wasn’t Yahoo’s shareholders, but Microsoft. “This is another step in the public negotiation between these two companies,” he noted. “We believe this deal is turning friendly. But, Yahoo’s alternatives are dwindling.” He’s right about that; News Corp. recently bowed out of a possible deal with Yahoo.
On the other hand, Microsoft doesn’t have a lot of options either. Mark Mahaney of Citi Investment Research thinks the software giant might be persuaded to come up in price after this. “Buying Yahoo may be Microsoft’s ONLY game-changing option in (the) Internet sector,” he wrote.
And then there’s Henry Blodget, writing for the Silicon Alley Insider. He thinks Yahoo’s plan “is more of a ‘best case’ scenario than a ‘most likely’ scenario,” but he didn’t dismiss it outright. Doing some math and making some projections, Blodget calculates that Yahoo is saying it will be worth $50 to $60 per share in 2010. “Discount that back to today and you’re looking at about $40-$50 a share. Thus Yahoo’s assertion that it’s worth at least $40 a share.” In short, this is why Yahoo rejected Microsoft’s offer of $31 per share.
The problem with Yahoo’s math, according to Blodget, is that it’s too optimistic. Take the area of display and video ads, where Yahoo projects its strongest growth. Blodget thinks that assumption is “reasonable,” but makes one very significant caveat: “This absolute growth would almost certainly not be possible in a recession.”
Michael Liedtke, writing for the Associated Press about Yahoo’s projections, pointed out what most analysts have been saying: Yahoo is being overly optimistic. “After subtracting ad commissions, Yahoo’s revenue predictions of $7.1 billion in 2009 and $8.8 billion in 2010 are well ahead of analyst estimates. Analysts, on average, had been anticipating $6.4 billion in 2009 and $7.6 billion in 2010.”
We can’t ignore the fact that this is playing out against the backdrop of Microsoft’s unsolicited takeover bid. Indeed, if Microsoft hadn’t made the bid, it’s questionable whether Yahoo would have gone public with this investors’ presentation. Many analysts speculate that the entire point of the move is to get Microsoft to raise its bid for the search engine.
The next move is up to Microsoft. The software giant is likely to stand firm for at least a little longer. First of all, it doesn’t really lose anything by waiting, with Yahoo running out of options. Second, if Alibaba actually does buy itself back from Yahoo, that will reduce the company’s value in Microsoft’s eyes, giving the OS king even more reason not to raise its bid.
There’s a third reason to hold firm and play the waiting game. Yahoo won’t be announcing its financial results for the first quarter of 2008 until April 22. While the search engine has expressed optimism that it will achieve the results Wall Street expects (and then some), it has experienced two years of little to no growth. The numbers that Yahoo delivers in late April will help decide Microsoft’s next steps.
Every investment vehicle says that “Past performance is not a predictor of future growth.” Yahoo seems to be depending on this, or at least on the idea that a company’s immediate past performance doesn’t have to be a trap for the future. If Yahoo can’t survive on its own, it would probably at least prefer to be purchased on its own terms.
A graceful, “friendly” buyout could still happen, but Microsoft holds the ultimate trump card: it could stage a coup and take over Yahoo’s board of directors. There’s less talk of that now than there was in the first couple of weeks or so after Microsoft made its initial offer. Indeed, CNN Money cited “a person familiar with the situation” as saying that the two companies entered into preliminary talks about Microsoft’s offer on March 17, which could open the way to an amicable marriage. Either way, in the face of Google’s dominance of the search market, both companies are running out of options for a strong future.