Five reasons to buy Yahoo stock

The struggling Internet company may look like a basket case but now's the time to jump in.
By Adam Lashinsky, senior writer
Last Updated: October 23, 2008: 4:02 PM ET



With billionaire activist Carl Icahn on Yahoo's board,
CEO Jerry Yang's tenure may be cut short.


SAN FRANCISCO (Fortune) -- Here's why you should buy, not bail, on Yahoo.
1. Eventually, management will get tossed.


Starting with the least scientific or analytical reason for owning Yahoo, there's every reason to believe the days are numbered for CEO Jerry Yang and President Susan Decker. By all accounts fine people, they simply haven't led Yahoo well.

The former excelled as Chief Yahoo, dabbling in deals and motivating the troops. But Yang hasn't been a decision leader and is "lurching from crisis to crisis," as The New York Times aptly phrased his tenure. Decker, in turn, is widely derided in Silicon Valley as too much the finance chief, not enough the operations guru.

Yahoo's doormat board tolerated Yang's ascension to CEO as a way of appearing to not have fired his predecessor, Terry Semel. Now that raider Carl Icahn - who has been quiet of late regarding Yahoo (YHOO, Fortune 500) - is on the board, though, action is far more likely.

Were the board to dump Yang and Decker it's an easy bet the stock would pop, even if they didn't immediately name a successor.

2. Microsoft will return.

Microsoft (MSFT, Fortune 500) continues to deny that it's interested in bidding again for Yahoo. It is forced to make these protestations because Steve Ballmer can't seem to stop talking about why such a deal would make sense.

The math is pretty straightforward here. Microsoft offered to buy Yahoo for $31 per share. Yang thought his company shouldn't fetch a dime less than $37. Microsoft said it was willing to pay $33. Today, Yahoo has been nosing below $12. Microsoft, instead, has been talking about buying back more stock.

Just wait. Microsoft likely is waiting to see what the Justice Department has to say about Yahoo's search-advertising deal with Google. When that's all done, a Microsoft-Yahoo tie-up makes as much sense as ever, especially considering that Microsoft, amazingly, still can't make money in its online business. It needs Yahoo's scale to get profitable.

There is another Microsoft option that could benefit Yahoo and its stock price. "We believe Microsoft is waiting in the wings to replace Google (GOOG, Fortune 500) as a search outsourcing partner," writes Marianne Wolk of Susquehanna Financial Group, "which could afford Yahoo some upside lift to [its] earnings forecasts, assuming there is a minimum guarantee from Microsoft to exceed Yahoo's internal figures as incentive to get the deal done."

That's a good thought: If Google can't help Yahoo make money, Microsoft will.

3. Investors are looking for reasons to buy this stock.

In the initial hours after Yahoo reported a generally atrocious third quarter and a bleak outlook Tuesday, its stock popped. The various reasons postulated by observers were amusing when taken as a whole. The San Francisco Chronicle guessed this was due to "relief that Yahoo's fourth-quarter financial guidance wasn't as bad as feared."

Others chalked it up to the cost reductions associated with announced layoffs of 10% of Yahoo's workforce - even though the layoffs were widely expected and therefore shouldn't have affected the stock price. One analyst, Mark Mahaney of Citigroup, praised Yahoo for having had the foresight to avoid stock buybacks until now - and then prognosticated the positive impact of future buybacks. "We note that the company ended [the third quarter] with about $3.3 billion in cash and no debt," he wrote, adding that buybacks were likely.

4. Long-term trends favor Yahoo.

Yes, Yahoo is losing share to Google. Yes, Yahoo is barely growing. Yes, it's a tired argument that Yahoo is one of the strongest brands in the media world. Yes, this argument for owning its stock hasn't worked in a long time. Yet the argument still holds water. The company global page views grew 17% in the third quarter. It's part of an industry, online advertising, that will continue to grow (or at least take share) no matter the economy. Compared with The New York Times, a sterling brand in a declining industry, Yahoo is a powerful brand in a growing industry.

5. It's cheap.

There's always that. Morgan Stanley's Mary Meeker figures that given the value of Yahoo's cash and its publicly traded Asian assets (even taking into account the difficulty in selling stakes in other companies), investors value Yahoo's core business at just $6 per share, or eight times Wall Street's estimates of 2009 profits. That's an extraordinarily low multiple for any company with the opportunities in front of it that Yahoo has. Yahoo's management thought Yahoo was cheap at $30, of course. Today, investors would do quite nicely for a fraction of that amount.

Still 'Woo-Hoo' Over Yahoo

This fall, Yahoo will start handing out to more than 500 newspapers across the country the keys for its new ad-management platform. The gift could not have arrived at a more a desperate time: Strapped by plunging advertising revenue — including online, which fell for the first time in Q2 since the Newspaper Association of America started tracking it in 2003 — newspapers need something to drive revenue back into positive territory.

The new platform is called APT for now, although Yahoo said it plans to announce a new name (Yahoo's press machine declined to reveal it before the official launch during Advertising Week in New York). But regardless of what it's called, APT is the linchpin of the Yahoo alliance.

Expectations are high: APT promises to open up more online inventory and help papers dramatically increase reach in designated market areas (DMA). It gives newspapers — once severely challenged in aggregating across multiple markets — the ability to offer advertisers one common platform on which to make multiple buys. It also helps publishers offer advertisers a much more precise way to influence potential customers.

"It greatly increases our ability to match advertisers with reaching their customers in the local marketplace," says Charlie Chance, director of digital and recruitment platforms at The Atlanta Journal-Constitution. The AJC used DoubleClick's system for ad management in the past. "This is an ability the newspaper industry has not had before," he adds.

The Cox Newspapers daily is one of dozens of papers that have been using the platform in what the alliance calls "stage one." It's not a full-blown rollout: Since October '07, Yahoo has been giving the AJC access to limited ad inventory in the Yahoo Atlanta channel. Once that inventory is sold, it is manually entered into the system.

If stage one is a test drive in first gear, Chance says that the AJC still has reaped benefits even from the scaled-back offering. The paper sold seven figures worth of advertising on the Yahoo Atlanta site. Across all the stage-one sites, which now number more than 50, newspapers brought in $10 million in Yahoo advertising revenue, confirms Lem Lloyd, vice president of Yahoo's newspaper consortium.

Chance tells E&P how his paper hooked a large advertiser that had left the paper a number of years ago. Now it's back — and was impressed enough to spend six figures and sign an annual contract. "That revenue came from an existing budget transferred over because of the size and quality of the audience," he says.

That's because with Yahoo's Atlanta channel, the AJC's market reach expands threefold. Along with the daily's print and online versions and Yahoo Atlanta, the partnership covers 80% of the Atlanta DMA. Prior to that, the AJC could only offer a third of that coverage. In conservative terms, says Chance, the partnership tripled the AJC's audience.

Breaking it down To put it simply: The alliance brings more online inventory and audience to news- papers and more local salespeople to Yahoo.

"Yahoo extends our reach significantly," says Tim Lott, vice president/digital media at the Austin American-Statesman. The Statesman is also one of the early news- papers to try out the ad platform, and is planning for a full-blown launch some time late this month. "We are not naive enough to believe that we have every single visitor that Yahoo has," he admits. "I think Yahoo is smart enough to know we reach people that they don't. They are sure smart enough to know our local sales force has authority and relationships."

There are rough boundaries that both sales teams — those who work for the newspapers and those for Yahoo — must adhere to, in order to prevent channel conflict (too many people from different cAPTs selling to the same advertisers). For the most part, Yahoo reps cannot sell one newspaper alone, and a newspaper cannot sell into multiple Yahoo channels. Explains Chance: "Yahoo has a sales force charged with Fortune 1000 companies. They have pretty significant revenue goals, and they can't afford to take one-market buys for advertisers. It's not in their best interest."

Likewise, newspapers in the alliance can strike regional deals since they have one common ad platform with their own online properties.

The old notion of how newspapers go about selling to advertisers is also turned on its ear. Newspapers are used to pitching by sections, even online. But with the help of Yahoo and the industry's emphasis on total reach, newspapers are finally learning to sell audience. Yahoo is conducting sales seminars in which representatives from the Internet giant come to the property and work with everyone from the publisher and vice president of advertising to the sales teams. "We go deep selling audience, versus sections," says Lloyd.

This they can do because Yahoo's new ad platform is giving newspapers the capacity to target consumers based on behavior, a capacity aptly named behavioral targeting (BT). Classified Intelligence reports that BT advertising spend is advancing at a quick clip. eMarkter forecasts it will reach more than $1 billion in 2009, quadrupling by 2012.

APT tracks a user's behavior through cookies on Yahoo and the partner news- paper, but nowhere else. For instance: A 28-year-old user does a search for ski equipment on Yahoo, does another search for ski resorts, and then reads an article on AJC.com about hitting the slopes in Keystone, Colo. Yahoo surmises based on that person's "behavior" that he is planning a ski trip: The next time he goes back to Yahoo or the AJC.com, in this exAPTle, the two properties can serve him skiing-related ads — whether he's reading the sports pages online or checking his stocks on Yahoo financial page. In other words, the newspaper can offer a ski-related advertiser more pertinent ad positions than just the travel section.

"The real beauty for us, and a limitation for us in the past," Chance says, "is that we have always had the ability to zone [print]. On the Internet we haven't had that ability. In the Yahoo environment, we segment behavior and location."

He explains with another exAPTle: "Say you're looking for a female looking for shoes in the Northeastern portion of Atlanta. Now we will be able in the digital world to segment audience appropriate to the advertiser."

Think of it as digital zoning.

Leon Levitt, vice president of digital media at Cox Newspapers, says, "What that means to us is our CPM" — cost per thousand — "will go well north," somewhere in the range of a 50% lift. "Most of us have been pretty successful selling premium inventory — the homepage. BT takes that third click in the sports section and turns that into a premium ad. Those ads today are selling in remnant for a buck or two per CPM." BT could turn that same inventory in sports into $20 to $30 CPMs, he says.

"Another piece of this," Levitt continues, "is that Yahoo can sell into our inventory." Cox's paper in Greenville, N.C., for exAPTle, might not see so much national advertising. But with Yahoo and BT in the picture, they could in theory cut a deal with General Motors to target people looking to buy Chevy pickups. "Greenville will get some of that," he adds.

The Statesman's Lott says that before Yahoo's platform, ad sales staffers were limited in their ability to segment the audience. They pitched sales based on such information as age, ZIP code, and gender, collected when users registered to access online content. "You can sell, let's say 25- to 34-year-old males in a certain part of Austin, but that relies on the accuracy of the information provided. I think Yahoo offers much more reliable behavioral information," he says.

He's jazzed about the potential to reap national ad dollars. The big guns tend to focus on the top 10 or 15 markets across the country. With the BT ads, Austin could make some progress with the national category.

A new way of thinking Lott, who came up through the newsroom and admits he retains a reporter's natural skepticism despite his positive outlook on the Yahoo partnership, calls it a "silver lining for newspapers." He described a set of meetings the day before he spoke with E&P in September: A conference call with Yahoo to set up the rate card; a meeting with the CFO of the paper and the financial team to go over some of the reporting and analysis features of the new system; and a third meeting with the publisher and vice president of advertising to discuss how the new platform is different from the old system (the Statesman used DoubleClick).

To borrow a popular word in the political sphere, it's going to require newspapers to change — change from within, and change in communicating the message to local advertisers.

Says Yahoo's Lloyd: "When you are selling luxury car buyers as an audience, you are not going to car dealers and saying your ads are appearing on the front page of the sports section. What you say is that you've figured out that if X is a luxury car buyer, she is going to see that ad regardless if she is reading a financial story or checking her e-mail. We deemed through her actions that she is in the market for a luxury automobile. That is an important, critical, different way of thinking."

With that comes insight that newspapers have valuable audiences and should price their inventory accordingly. It's time to think large. "Newspapers really need to make their reps ask for big buys," says Lloyd. "The sales force needs to feel confident and understand there is a significant marketing budget even locally for online. The reach you have is huge. It's exciting stuff. We're really bullish."

It will require a significant amount of energy that will be especially needed on the ad side, but the effort could pay off handsomely in the future. Take it from Lott, who adds: "If I had to say one thing, it feels good to be playing offense."