Yahoo's Turnaround Trudges On
We believe the firm can improve its near-term fortunes, but its longer-term position is unclear.
Yahoo (YHOO) continues to take steps toward reigniting its core business, but progress remains modest at best following another mixed quarter. We remain skeptical about the long-term prospects of a resurgence for Yahoo, and we are sticking with our narrow economic moat rating. Still, we believe the shares could offer a reasonable risk/reward trade-off at current levels, provided that management can protect the platform's current value and successfully execute the plans for a tax-free spin-off of Yahoo's stake in Alibaba Group (BABA).
Although second-quarter GAAP revenue grew 15% versus the prior-year period, revenue excluding traffic acquisition costs was essentially flat in the quarter as Yahoo continues to invest heavily in its partnership with Mozilla for preferred search placement. Management expects search and display traffic acquisition costs to remain elevated over the next several quarters as it focuses on GAAP revenue growth and improving engagement metrics for its advertisers. We have some concern that Yahoo is walking a fine line with this strategy, as it is investing in an advertising platform that has ceded substantial market share over the past several years. Still, there were some encouraging developments in the quarter, as Yahoo generated its best price-per-ad growth in over two years, driven by greater uptake in its native video ads and generally higher pricing for video ads overall.
Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.