NEW YORK – Despite Yahoo’s (NASDAQ:YHOO) recent acquisition spree, investing the company comes down to one simple fact, the effectiveness and popularity of its search engine. Unfortunately, for Yahoo, the company is still no match for Google when it comes to search.
In recent years, Yahoo has invested heavily into other internet companies including, Hotjobs.com, Tumblr, Hitpost; the company also has a stake in Alibaba and should make a hefty profit from their upcoming IPO.
However, Yahoo has failed to turn a profit while their competitors are sitting on a mountain of cash. For example, in the past ten years Yahoo’s operating income has slumped while Google, Apple (NASDAQ:AAPL), Sina (NASDAQ:SINA), and Baidu (NASDAQ:BIDU) have grown. Even worse, without the acquisitions, Yahoo would possibly be insolvent as their main business, search, has continuously lost money in recent years.
Chinese competitors are gaining on Yahoo and Sina, in particular, appears to be climbing into persistent positive operating income. Whilst Baidu seems even stronger, resembling a Chinese version of Google. If Baidu chose to, they could threaten Yahoo’s market share in the U.S.
For Yahoo, their revenue stream falls into two broad categories, acquisitions, and search; however, the diversity of the company’s acquisitions complicates attempts to estimate the likelihood that Yahoo will profit from a particular investment. For search, well the market for English language search begins and ends with Google while Asian search engines are growing stronger it will be some time before they can challenge Google’s dominance. While for Yahoo, they are increasingly becoming an afterthought in a market they used to own.
The conclusion is that while Yahoo is had some successes over the past year, the fundamentals that drive the business – revenues and profits are not solid. In fact, if the acquisitions were taken out of the mix Yahoo could be looking at a Blackberry like trajectory into oblivion. Until or unless Yahoo radically changes its search engine performance or transitions to substantially different corporate strategies and revenue sources, investors should think twice about their investment in the company.
Share of Yahoo are currently trading near $ 34.50 and are up almost 75 percent for the year. However, the company remains well off their all-time high of $ 118.75 per share. Google is currently trading at well over $ 870 per share.