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Yahoo! Becoming an Extension of the Internet

Wednesday - 7/10/2013, 3:13am  ET

Yahoo! has been on a tear with acquisitions recently. The company is heavily disciplined about cutting back on operating costs, returning cash to shareholders, and driving user-driven metrics to its websites. It seems to be on track with meeting many of its goals as CEO, Marissa Mayer, has been out on a web 3.0 land grab.

The CEO’s most recent acquisition

Yahoo! just recently acquired Xobni. The company released an application/program that allows a user to effectively centralize all of their data and contacts within a single location. This is becoming increasingly important because it has become difficult to centralize contact information between all of the different social networks, e-mail clients, and personal contact lists that users create.

AllThingsD estimates that the company was acquired at around $30-$40 million. This is a relatively cheap price to pay for an application that is becoming popular amongst Android, Gmail, and IOS users. After the use of Xobni, the average user is able to increase the number of contacts by 100% and is able to follow that success with 47% growth in the following year. The company also estimates that 80% of Fortune 500 companies use Xobni products.

In its most recent shareholder meeting, Yahoo! reported that it was able to grow mail user activity by 10% (no time frame was mentioned). However, the integration of Xobni with Yahoo! Mail will improve the amount of user activity on Yahoo! Mail.

Investors should remain fairly optimistic because Mayer continues to deliver on her promise to improve the amount of display-advertising revenue.

How to position

For the most part, I am optimistic about Yahoo!’s growth. The company plans to improve the amount of net operating income it generates from its operations. By Yahoo! improving its net operating income, the company is able to acquire more companies. The benefits are twofold because the company is now focused on buying innovation rather than depending on innovation from within. It’s more predictable to go and buyout talent than it is to groom it. After all, Facebook  was invented by a small group of Harvard dropouts, not by IBM.

Analysts on a consensus basis estimate that the company will grow earnings by 13.7% per year over the next five years. The growth rate is fairly sustainable when considering the company’s disciplined approach to cutting costs, and its focus to improve the overall website experience of Yahoo!.

Will this ruffle Google's feathers?

Source: Statista

Google is far ahead of the competition. Currently Mozilla Firefox and Google Chrome are the most dominant web browsers in the world. By default, Mozilla Firefox and Google Chrome will use Google search. This leads to better monetization opportunities for Google through Google AdWords. The Google AdWords business is currently growing, as the segment was able to report 18% year-over-year growth in the most recent quarter.

Google’s growth is also likely to be supplemented through Android. The Android operating system appeals to an overwhelming percentage of smartphone users across the world. Because of this, analysts have projected Google to grow sales by 41.2% in the current fiscal year, and 16.9% in the following fiscal year.

Yahoo’s! positioning improves

Investors should taper their expectations of Yahoo’s! future. What I mean is that Mayer’s strategy is aimed at gradually shifting the overall perception of Yahoo! and its product platform. There won’t be a magic switch that will turn on a rapid increase in the usage of Yahoo! search or Yahoo! mail. The company is aiming to improve its position gradually against major competitors like Google, Facebook, and Bing.

Facebook is becoming an increasing threat to Yahoo! because it offers a lot of the same services that Yahoo! provides. For example, a Facebook user can share pictures, videos, share blog posts, send e-mails, and chat all from one location. To do the same on Yahoo! a user would need a Flickr, Tumblr, Yahoo! mail, and Yahoo! chat account. To counter the negatives of having to be so far spread between all of these services is to improve the functionality of each -- so that it can appeal to a specific niche -- and to provide integration, by offering users the ability to log-in through Facebook, on to all of these applications.

In other words, Yahoo! products are becoming an extension to what a user deeply desires, an improved version of what some may want to do. The only weakness in Yahoo’s! current strategy is in user-generated videos. The space is becoming increasingly competitive as YouTube dominates longer videos. Shorter video sharing is currently owned by both Vine (owned by Twitter) and Instagram video (owned by Facebook).

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