January 11, 2007

Yahoo Searches for Stability

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2006 26

The year 2006 ended with the stock prices of two of the biggest names in online search going in distinctly opposite directions.

Eight-year-old Google saw its stock price rise 11% percent in the year (from $415 to $460). Yahoo, its 11-year-old rival, suffered a drop of 33%, its share price plummeting from $39 to $26 in the same period. The decline translated into a loss of $20 billion in shareholder wealth, according to the Associated Press.

That occurred even as some of Yahoo’s other economic indicators were trending upward. In the third quarter, for instance, ad revenue—which accounts for roughly 90% of Yahoo’s total revenue—was up 18% over the previous year. Revenue from subscription fees increased 23% in that same period, according to a financial report released by the company. Moreover, it’s still the world’s most visited web site.

For several reasons, however, Wall Street appears to have lost some confidence in Yahoo. First, there is the belief that the company isn’t monetizing enough revenue from its search engine. Merrill Lynch analyst Justin Post estimated that Yahoo generates only four cents per search compared to 11 cents on Google.

Second, there are concerns that Yahoo may not be sufficiently focused on its core business. In late November, an internal document from the company quickly became known as the “peanut butter memo” when it criticized Yahoo’s strategy as one spreading a thin layer of peanut butter across a large number of ventures rather than one concentrating on a few lucrative ones.

Indeed, the shift away from its identity as a technology-centric company was perhaps most evident when Yahoo expressed ambitions about offering more original content. In late 2004, the company lured Lloyd Braun away from ABC, where he had been the chairman of the network’s entertainment group and the creative force behind the hit-series Lost. But Braun’s aspirations of transforming Yahoo into more of a media company never got off the ground, and he left in December 2006.

Now Yahoo may be getting back to its basic roots. It is expected to upgrade to its search engine technology in early 2007, an initiative the company refers to as the Panama Project. Panama could raise revenue per search as much as three cents, according to Merrill Lynch, potentially narrowing the gap between Yahoo and Google and making investors happier as well.

As the accompanying chart illustrates, Yahoo has in the past demonstrated an ability to dig itself out of a hole. When the Internet bubble burst in late 2000 and early 2001, many companies ceased to exist. Yahoo, its stock price far below what it was in the late 1990s, fought back and reasserted itself as a major player. Now the question is–can it pull off another comeback?