Yahoo (
YHOO
), which competes with Google (
GOOG
) and AOL (
AOL
) in the search business, is seeing relatively stable profit margin
of 42% since 2008 by our estimates, and we expect the margin to
rise slightly over the coming years as Yahoo benefits from its
partnership with Microsoft (
MSFT
). In 2009, Yahoo and Microsoft signed a deal whereby Yahoo will
not only use Microsoft's search technology on its websites but will
also keep majority of the ad revenues. Yahoo is also making efforts
to control costs, by cutting its workforce, which should improve
profitability in the short term.
From 2006 t0 2008, Yahoo's search EBITDA margin saw a steep
decline from around 52% to 42% led by the sluggish economy causing
companies to spend fewer advertising dollars. Competition also
stepped up as search giant Google expanded its market share putting
additional pressure on Yahoo and others.
While we expect Yahoo's search advertising EBITDA margin will
rise to 44% in 2011 and remain at that level over the forecast
period, Trefis members predict the search margin will cross 54%,
representing an upside of 3% to YHOO stock. We currently have a
Trefis price estimate of $17.88 for Yahoo's
stock
, ahead of the current market price of $16.91.
Microsoft Partnership Could Boost Yahoo's Search Margin
in Near Term
Microsoft made a hostile attempt to buy Yahoo in 2008 for $47.5
billion but the deal did not go through. However, the two companies
agreed to a 10-year deal to boost their online search and
advertising businesses as well as create stronger competition for
Google which dominates the online search and advertising
market.
Through the Microsoft deal, Yahoo is expected to make more money
as it's allowed to keep 88% of revenues from search ads generated
from its website for the first five years of the contract while
Microsoft absorbs most of the expenses. According to a study by
digital media services company, this search alliance could boost ad
rates by as much as 78% and that the long-term cost-per-click (
CPC
) rates for ads will stabilize at 13% to 23% above current levels.
The higher rates imply that advertisers get a bigger search
platform to reach consumers. (See:
Microsoft Search Alliance Could Boost Yahoo Stock by
2%
, Trefis, Sept 24, 2010)
Cost Controlling Initiatives Can Improve Margins
Yahoo has regularly cut its workforce in recent years. It
trimmed 1,400 jobs in December 2008 at the peak of recession, 700
jobs in Q2 of 2009, and 650 jobs in December 2010. In the recent
conference call for Q4 2010, Yahoo announced a layoff of another 1%
of its workforce. We expect such cost-cutting initiatives will lift
Yahoo's margins in the short-term. (See:
Yahoo Focus on Cost Cutting, Needs Top Line Growth
to Move Stock
, Trefis, Feb 1, 2011) However, in the long-term, Yahoo has to
focus on improving its top-line revenues to sustain its current
margin levels.
Trefis Community Forecast
Trefis members expect Yahoo's search advertising EBITDA margin
will increase from 48.4% in 2011 to 54.3% by the end of the Trefis
forecast period, compared to the flat baseline Trefis estimate of
44% over the Trefis forecast period. The member estimates imply an
upside of 3% to the Trefis price estimate for Yahoo's stock.
Our
complete analysis for Yahoo's stock is here
.