What must Yahoo do? In the last year its founder chief executive was ousted in favour of cost-cutting kudos. It agreed to outsource the data-crunching technological side of search to Microsoft. And last week the group inundated investors with facts designed to demonstrate the potential of Yahoo's advertising business. Yet its shares have been left behind in the tech rally, ending the week at the same price that they started May.
The simple answer is that Yahoo must grow. Opportunities abound – for instance three-quarters of Yahoo's 600m users are outside the US, while the group makes only 27 per cent of revenues internationally – but management were largely quiet on strategy to expand sales. Focus was instead on plans to save money by correcting past mistakes. So from using 33 different types of computer code to run its homepages, they will soon all be based on the same software. Operating margins of 6 per cent this year are forecast to rise to 15-20 per cent by 2012.
Such a large improvement in profitability is less heroic than it sounds. Bernstein estimates that on current strategy, and with the Microsoft deal, margins should anyway hit 16 per cent. Assuming 5 per cent annual growth in sales and a 17.5 per cent margin, Yahoo's current multiple of six times earnings before interest, tax depreciation and amortisation would suggest a price around $19 per share in 2011, a fifth higher than now.