Yahoo (
YHOO
) competes with Google (
GOOG
), Microsoft (
MSFT
), AOL (
AOL
) and Facebook in the display as well as search advertising market.
Here we explore upside and downside scenarios for Yahoo's display
and search advertising business, which account for around 18% and
17% of our
$17.88 price estimate for Yahoo stock
respectively. Our price estimate is roughly 5% ahead of market
price.
8% Downside - Yahoo RPM Rates Continue to
Decline
Yahoo's revenue per page view (
RPM
) has declined from around $1.39 per 1,000 page views in 2007 to
$1.02 in 2010, but we expect a rebound to around $1.22 per 1,000
page views by the end of our forecast period.
The U.S. online advertising market has made a comeback since the
recessionary period in 2009, growing by 14% from $22.7 billion in
2009 to $25.8 billion in 2010. We anticipate continued growth in
this market going forward.
However, Yahoo's U.S. online ad revenues actually dropped in
2010 as the company saw a downtick in its market share. Yahoo
seemed to be unable to leverage the ad market growth, lagging
behind peers like Google and Facebook. This adds a bit of risk to
our bullish estimates for Yahoo's RPM.
Yahoo RPM declined by around 5% from $1.07 in 2009 to $1.02 in
2010, despite the better year for the overall online advertising
market. If we extrapolate this decline into the years ahead, it
would imply RPM of about $0.7 per 1,000 page views by the end of
our forecast period (vs. the $1.22 that we currently forecast).
This scenario would produce an 8% downside to
our $17.88 price estimate for Yahoo stock
.
5% Upside -Yahoo Operating Margins Improve
Yahoo has taken a few cost cutting steps to offset top-line
revenue declines as mentioned above. For one, Yahoo has reduced its
workforce in order to cut operating expenses (See
Yahoo's Cost Cutting Initiatives Can Lift Profit
Margins, Stock Value
).
Yahoo has also partnered with Microsoft to utilize Microsoft's
search technology for Yahoo searches. According to the agreement,
Yahoo will keep most of the revenues, while Microsoft will bear the
majority of the operating expenses associated with
Yahoo's search advertising business. Although this deal means
that Yahoo will lose the ability to proprietarily innovate its
search business, the agreement will spur notable operating cost
savings.
See our full analysis and $17.88 price estimate for Yahoo
Yahoo's operating margins have shown signs of stabilization in
the past few quarters, and we anticipate this trend to continue for
the foreseeable future. However, if cost savings initiatives gain
further momentum and Yahoo grows its display advertising margin to
36% and increases its search advertising margin to 50% by the end
of our forecast period, there could be 5% upside to our
$17.88 price estimate for Yahoo stock.
http://www1.emarketer.com/Article.aspx?we
forecastR=1008252