) recently announced weak Q2 2011 earnings that showed its search
and display businesses are limping along as it tries to compete
with Google (
) in search and Facebook's ascent in display advertising. Net
search revenues excluding traffic acquisition costs (TAC) reached
just over $1 billion for the quarter, a 15% decrease over Q2 2010.
The decline was attributable to lower revenue-per-search from the
Yahoo-Microsoft search alliance due to the problems being faced by
Microsoft's adCenter technology. A reorganization of the sales team
within the company also contributed to overall sales decline as
Yahoo was left understaffed towards the end of the quarter.
revised price estimate of Yahoo's stock stands at
, which is about 15% above the current market price, assumes
that Yahoo will get its display and search business back on track,
going forward. We have adjusted the price based on revised
forecasts of Yahoo's search market share and revenue-per-search
values. Our estimates have also varied based on changes in net
cash/debt positions over last quarter.
Yahoo-Microsoft Alliance Shows Weak Results
The Yahoo-Microsoft alliance continued to fall behind
expectations in Q2 2011. Technical issues in Microsoft's adCenter
platform led to revenue-per-search (RPS) being lower than expected
for the quarter. These problems have also seem to have adversely
affected Yahoo's search market share in the U.S., which declined
from 19.6% in May 2011 to 17.5% in June 2011, while Google stayed
dominant at 65.5%. With its upgrade of the adCenter continuing
through next year, we expect both search market share and RPS to
decline as competitors take advantage of these
Display Growth Has Been Sluggish
Growth in display revenues (excluding TAC) was close to 5% over
Q2 2010, considerably lower than the 10% growth in Q1 2011 over Q1
2010. According to the earnings conference call, the decrease is
attributable to a shuffle in the company's sales leadership
structure as well as changes in the sales force, which led to
reduced client interaction for the quarter.
With both Google and Facebook gaining significant market share
in the ad display market, it is crucial for Yahoo to maintain a
double-digit display revenue growth to keep pace in the future.
Display advertising accounts for 22% of our Yahoo valuation, and
our near $17 price estimate assumes that Yahoo will see a recovery
in its display revenues. If growth remains below trend going
forward and if search revenue fails to pick up, we could see some
downside to our forecasts.
See our full analysis for Yahoo