Honeymoon Period Over For Marissa Mayer

Yahoo has been distracting shareholders and analysts ever since Marissa Mayer took office with hyper-hyped acquisitions. Until recently, the actual financial performance of the company has not been called into scrutiny. Meanwhile Alibaba’s deservedly hyped IPO has provided a welcome shield (Yahoo is a big shareholder).

But now, Marissa’s honeymoon period is over. The market says: show me the money!

Yahoo Financials
Yahoo’s (Nasdaq: YHOO) third quarter revenues fell 3% over the year to $1.04 billion, missing the analyst expectations of $1.08 billion. EPS of $0.37 was also shy of the Street’s projected earnings of $0.38 per share.

During the quarter, display ad revenues fell 7% to $423 million with the number of ads sold growing 24%, but price per ad also fell 24% over the year. Search ad revenues grew 6% to $428 million. The number of paid clicks grew 3% and price per click grew 15% over the year.

During the quarter, Yahoo repurchased 21 million shares for $719 million.

For the current quarter, Yahoo projected revenues of $1.02 billion-$1.06 billion, falling short of the Street’s forecast of $1.10 billion.

eMarketer’s latest report on digital advertising projects worldwide spending on digital ads to grow 15% to $137.53 billion in 2014. The report projects that by 2018, digital ad spend will rise to $204.01 billion and will account for 31.1% of total media advertising compared with 25.3% share in 2014. In fact, a report published earlier this week showed that Yahoo’s share of the digital advertising market will reduce from 2.86% worldwide to 2.52% this year. Microsoft, on the other hand, is expected to grow its share marginally to 2.54% and overtake Yahoo for the first time ever.

Yahoo’s Reliance on Alibaba
The only silver lining in Yahoo’s dismal results was their announcement of plans to hold on to a larger share of Alibaba’s stocks. The Chinese Internet giant, Alibaba, is going public later this year and is expected to be the biggest tech stock listing at a valuation of close to $200 billion. Earlier, Yahoo was expected to sell 208 million shares of Alibaba. But that number has now been reduced to 140 million shares. While its own performance continues to falter, may as well keep shareholders happy by riding the Alibaba stock. Makes perfect sense!

Yahoo’s Acquisitions
Meanwhile, Yahoo has been trying to reach that elusive turnaround by acquiring additional capabilities and talent through acquisitions. Last quarter, they announced the acquisition of self-destructing messaging app Blink for an undisclosed sum. Blink has been developed by start-up Meh Labs and was launched nearly a year ago. The app lets users customize the duration for which a message will be available before vanishing. The Blink team will become part of Yahoo’s communication group.

Till recently, Yahoo was building up their content through acquisitions. Now, they are boosting their delivery portfolio as well. Recently, Yahoo announced the acquisition of video streaming service RayV for an undisclosed sum. Founded in 2005, RayV offers HD video quality streaming services focused on mobile devices. Earlier this year, Yahoo had already begun adding to its video content library. They announced the commissioning of two new comedy shows as part of exclusive content for their video services and also collaborated with events producer LiveNation to bring one live concert a day to their online audience. More recently, Yahoo also entered into content agreements with NBC for the sixth season of Community and with HBO for the first episode of The Leftovers. RayV’s acquisition will add to their video delivery platform and help them expand into mobile video services.

Yahoo’s CEO, Ms. Merissa Mayer recently completed her two year anniversary. The stock has recovered since she took the reins, but it is still a far cry from Yahoo’s golden days. Search and display revenues are not picking up as expected and their stock is trading at $35.61 with a market capitalization of $36 billion. It touched a 52-week high of $41.72 in April this year. The problem with Marissa’s approach thus far is that it is heavy on hype, and light on fundamentals. I am still scratching my head trying to figure out what on earth is her monetization plan for all the assets she has bought. The market, in the next few quarters, will do the same.

Currently, the only real case for investing in Yahoo is to gain access to the Alibaba upside.