Search Advertising Can Help Make or Break Yahoo's $17 Value

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The Yahoo-Microsoft search alliance hasn't really taken off as per expectations causing a drop in Yahoo's ( YHOO ) revenue-per-search. This was one of the key reasons for a lackluster Q2 2011 performance by Yahoo. (See Google & Facebook Give Yahoo a 1-2 Combo in Search & Display ). We estimate that search advertising in the second most valuable division for Yahoo at 13.2% of our stock price estimate, and a declining search market share is likely to have a significant impact on its stock price. Yahoo has traditionally been unable to compete strongly against Google's ( GOOG ) superior search algorithms, and now faces threat from Facebook in its core display advertising business.

While we expect Yahoo's search market share will decrease from 5.9% in 2011 to 5.2% by the end of our forecast period, Trefis members predict an increase from 7.5% to 8.8% during the same period. The member estimates imply an upside of 10% to the Trefis price estimate for Yahoo's stock, and this upside is warranted only if Yahoo's search partnership with Microsoft ( MSFT ) produces results and if yahoo is able to build search algorithms comparable to Google's.

We currently have a Trefis price estimate of near $17 for Yahoo's stock , about 16% above the current market price.

Yahoo's Search Engine Lags Google's

Google has an all-pervasive reach in Internet search business leaving a small share of market to players like AOL, Microsoft, and Yahoo. With a market share of around 70%, Google undoubtedly dominates the search market, and any player truly looking to challenge Google's market position needs to match up to the search Goliath in technical expertise and brand power. Although Yahoo has made efforts to improve its search algorithms for both paid and organic listings, they are still arguably less relevant than Google's.

Yahoo-Microsoft Alliance Needs More Steam

With the aim to improve web search experience for users and advertisers and stage a formidable threat to Google, Yahoo and Microsoft formed an alliance wherein Microsoft Bing's search algorithm would power searches on Yahoo, and Yahoo's search ad rates could improve drastically. However, the partnership hasn't been producing results as expected. Technical issues in Microsoft's adCenter platform have resulted in lower-than-expected revenue-per-search (RPS) for Yahoo in Q2 2011, and has also lowered Yahoo's search market share in the U.S., from 19.6% in May 2011 to 17.5% in June 2011.

Our complete analysis for Yahoo's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AOL , GOOG , MSFT , YHOO

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