Yahoo! (NASDAQ: YHOO) May Bounce Back From Another Disappointing Quarter

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By Thomas Copeland on July 21, 2014 Company, Technology & Software

Yahoo! (NASDAQ: YHOO) disclosed disappointing reports for the second quarter of this fiscal year.

Analysts criticized the company’s management for disappointing results after working for two years trying to rebuild an outdated brand. Analysts were also unpleasantly surprised by the decline in price of Yahoo!’s display advertising.

Shareholders are scrambling to rid themselves of the company’s shares. However, it is important to note certain moves that the company has made to recover.

First, Yahoo! lowered its required secondary share sale from 208 to 140 million shares in the wake of the anticipated Alibaba (BABA). This move is beneficial to shareholders, because Alibaba is a company with immense growth, but is likely to have an low price on the IPO, since the size of the transaction is expected to be enormous – meaning many shares to meet demand from investors. Also, by lowering the number of shares it is required to sell, the tighter deal helps Yahoo!’s pricing dynamic.

Second, Yahoo! is working hard to buyback its shares and reduce its share count. With the upcoming Alibaba IPO as well as a decreased stock price after the second quarter report, Yahoo! will most likely continue its aggressive buyback endeavor.

Third, the company has been very careful in its quest for acquisitions. Yahoo! decided against buying AOL. And it’s purchase of Tumblr, although initially criticized by many, seems to be a plus in Yahoo!’s rebranding campaign and is a huge asset in making Yahoo! appeal to a younger and socially aware user base.

Fourth, Yahoo!’s traffic and online engagement is finally picking up after years of slumps. Through May, the number of unique visitors in the United States has increased by 5% year over year and 1% quarter over quarter.

By comparison, social networking giant Facebook Inc (NASDAQ: FB)’s traffic has grown 3% year over year. However, it is interesting to note that Yahoo! produces more traffic than Facebook does in the United States, despite its slow growth spell and perceived insignificance.

Yahoo! also reported that page views per user have increased in the last quarter – from 5.5 page views per user per day in the first quarter of 2014, to roughly 7.2 page views in the last quarter. In comparison, Facebook’s page views per user per day is on the decline, according to Alexa.com.

The reason for this increase in engagement could be that some of the new rebranding plans Yahoo! had launched are finally paying off. The fully restyled Yahoo! Mail and digital magazines are just some of the company’s initiatives. Many auxiliary sites, such as the digital magazines, are published on Tumblr’s social platform, which would help send page views and encourage social engagement, as well as rejuvenate Yahoo!’s sites by exposing them to the younger demographic that primarily engages with Facebook.

Additionally, the surge of page views to Yahoo! pages from Tumblr could cause low initial ad prices, which would increase as demand and sales match the traffic. This could explain the 24% increase in display ad spaces and the 24% decreasing in price last quarter.

Another cause for the drop in Yahoo! display ad sales is programmatic ad buying by digital media buyers. Companies such as RocketFuel (NASDAQ: FUEL) and Criteo (NASDAQ: CRTO) use data-supported algorithms to increase conversions on the display advertisements, which are purchased on non premium sites and for low prices, but then converted into higher CPC’s. The sneakiness of these algorithms is prompting websites and webmasters to offer only premium programmatic ads to establish a set market price. These efforts, however, are yet to be seen.