Here's the big question for
2010. Can Yahoo turn around its business? And, does anyone care? J.P. Morgan Analyst Imran Khan during a conference call Monday told investors the company sits on its top ten pick for the first time
in years. While Yahoo faces many challenges, and management has made lots of mistakes in recent years, often times the company's story is misunderstood.
Khan says many people are
concerned that Yahoo will become obsolete. Overall, macro growth in display advertising should help the company recover. Search revenue share loss is less than the market share loss, he notes, urging
investors to take a closer look at the search market share. Market improvements should drive earnings per share growth.
Pointing to Yahoo's homepage, auto, finance and sports, Khan
says these sites continue to outgrow the industry average. Most analysts only look at page views, but he says it's the wrong metric to consider, because many page views don't take into
consideration publishers that use Ajax, (an acronym for asynchronous JavaScript and XML), a technology that helps to create interactive Web applications.
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Yahoo has 17% of display
advertising market share. If the market recovers, as Khan expects, the Sunnyvale, Calif., company will benefit from this upturn. Yahoo's percentage of "graphical revenue" as a percentage
of gross revenue continues to grow. In 2007, it was 25% of revenue. In 2009, it will be 26%, despite a significant decline in the display business. In 2010, Khan estimates it will become 27% of
revenue.
The search industry continues to focus on Yahoo's loss in market share. Khan reminds us that Yahoo's search market share dropped from 24.1% in 2007 to 19.5% in 2009. The
460 basis point drop in search market share is steep. But rather than look at the decline in search market share, Khan says to focus on revenue share to see the light. Perhaps he's searching for a
glimmer of hope when he points to the revenue share loss, which he says is significantly less than the search market share loss.
Yahoo dropped from 12.5% to 10.1%, losing about 240 basis
points. He says this analysis identifies that the market share loss is related to tool bars and traffic from other non-profitable tools. As Yahoo transfers search capabilities to Microsoft, Khan
expects to see monetization improve.
The transfer of power from Yahoo search to Microsoft Bing could help Yahoo gain in international markets, especially for English-speaking travelers in
countries, such as Italy or Spain. One thing I noticed during the holidays while on vacation in Barcelona, Spain, Microsoft's Bing automatically converted to Spanish or Catalan fewer times, if
any, compared with Google's search engine. Searches on Google continually defaulted to .es instead of .com.
Khan says on average revenue gained for Google translates to roughly 7 cents
per search, compared with 5 cents for Yahoo. So, even if Yahoo can muster up 10% to 20% growth, it could turn into a significant catalyst for them to gain market share, he says.
Any way
you look at it, Yahoo's search business continues to lag, but display advertising could offset any declines.