What Would You Do As YHOO
It’s that time of the year again, earnings season. The third quarter has ended, and public companies have shared how they fared. It’s a time of anticipation, an intense period of guesswork centered around how the professionals think companies did, i.e., the stock analysts, compared to how the companies actually performed. It’s a strange cycle. The better the guess by the analyst, the more money ultimately flows through their employer. The better they are, the more they end up influencing the stocks they cover, especially outside of earnings season. For the companies, it’s all about how well they do compared to what the pros think they will do. Beat their estimates, and you can often see an uptick. Fall short, and watch the stock fall as well. Sometimes beating estimates by only a little and not a lot can cause a stock to dip. It’s an unusual game impacting billions and billions in market cap every three months.
For the tech/internet sector, this earnings season saw few surprises. Guess who did well? Google and Apple. If anything, the surprise might have been just how well the companies did. Google looked reminiscent of its old self – crushing expectations. Old farts will remember when they had their first $1bn year, then their first $1bn quarter. In Q3 2010, they earned $7.29 billion, all of this while buying like mad and adding 1500 or so people to the payroll. Even more impressive, the company still has $33 billion in cash and cash equivalents. Shares are now back to the magic $600 mark (up 13% since the announcement) with the mark cap once again approaching $200 billion. Apple, though, can boast even better. They too had record revenues – $20.34 billion. They sold 14 million iPhones and more than 4 million iPads in the three months alone. The iPad didn’t outsell the iPhone but it generated more revenue. Apple’s stock is over $300, up 40% on the year, and they are the most valuable technology company, worth almost $100 billion more than Google and almost $80 billion more than Microsoft.
So, where does Yahoo fit in all of this? They still make money – about $1.6 in this past quarter. They still generate profits – approaching $400 million, with past business trends continuing too. Display is strong – up 17% – and search weak – down 7%. It’s a business that most consider stuck in a rut. They will famously be remembered for having had the chance to by Facebook and passing. Now, Facebook is valued 50% higher than Yahoo (on 1/4 the revenues). Yahoo’s stock movement is based less on what they will do and more on what is expected to happen to them, the rumor de jour focusing on their being acquired, perhaps taken private. It certainly can’t be a fun place to be, especially as the leader of the company.
Yahoo has plenty of cash, not Google cash, but several billion. Overshadowed in the talks of them being the major purchase was a rumor of them making a major purchase. The target – Groupon – the company that made a slight tweak to existing couponing models helping them unlock hundreds of millions of dollars in spend and become the fastest private company to a greater than one billion dollar valuation. Unlike, Facebook, chances are that when it becomes clear a deal won’t happen, it won’t be Yahoo’s fault. Groupon is simply making too much money and growing too quickly. They are also a very confident company, and so it would take an offer that Yahoo couldn’t afford for the CEO to agree to sell.
Were Groupon and Yahoo to combine, Groupon could become to Yahoo what PayPal is to eBay – that massive growth engine. There are countless synergies, the main ones focusing on how Yahoo’s assets could accelerate the already rapid new user acquisition growth. For us, talk of Groupon and Yahoo provides the opportunity to talk about some of the major trends to emerge over the past two years. The problem for Yahoo is that they don’t leverage either of the two major trends, of which Groupon would provide leadership. Groupon would give Yahoo a foothold into consumer commerce. Yahoo has hundreds of millions of users but very few credit cards. It’s an ad platform only whereas Groupon is a transactional platform. You don’t have to be a paying member, but their average revenue per user is far greater than Yahoo’s.
What other trend does Groupon illustrate? Search versus discovery. Pull versus push. Google makes a lot of money when there is intent. Where Groupon and others play is when people aren’t requesting something in particular. These businesses, similar to Gilt or Hautelook, curate deals, and outside of the discounts, they provide value in often picking out the newest, or best deal. For so long it seemed that businesses needed to capture intent to scale; but, we are seeing the rise of the curated deals, the flash marketers wielding their psychological toolkit, creating billion dollar direct response businesses that rely on email of all things. There isn’t commercial intent. There is, however, transactional intent. Yahoo could use that too. We all could. That they haven’t isn’t all their fault. It’s an ad business during a consumer spending boom. Users aren’t the big ticket guys, like cars, but the don’t-quite-need-but-want or look-how-much-I saved businesses are altering the flow of money, and we’re seeing first hand with Yahoo the difference between this recession and the internet bubble bursting.
