Yahoo! Springs Back to Life

Shares of Yahoo! (NasdaqGS: YHOO) have been on a tear lately, rising 18.6% since September 1, to $17.37.

Part of that gain has to do with the company’s hiring of Marissa Mayer, a former executive at Google (NasdaqGS: GOOG), as its new CEO in mid-July. Mayer was just the 21^st employee hired by Google in 1999 and has been credited with the clean look of the Google homepage and the common feel across all the company’s sites. That’s an approach she’ll likely bring to Yahoo’s pages—particularly its homepage—which are less user-friendly by contrast.

Mayer also managed and developed some of Google’s most important products, including Google Maps, Google Maps for Mobile, Local Search, Google Earth and Street View.

Mayer’s Hiring Came at a Tumultuous Time for Yahoo

The move capped a long period of listless or absent leadership for Yahoo, which had burned through five chief executives in the previous six years. Lowlights included a spectacular parting with Carol Bartz, who called the Yahoo board “doofuses” after Yahoo chairman Roy Bostock fired her over the phone.

A few months later, Yahoo poached Scott Thompson, the successful head of eBay’s (NasdaqGS: EBAY) PayPal department, to fill the top job. But Thompson was quickly forced to resign after claiming in his resume that he had a computer science degree that he didn’t, in fact, have.

After all that, it’s not hard to see why Yahoo investors shrugged when Mayer was hired. In fact, her hiring seemed to spark further controversy, since she was pregnant at the time, making some wonder whether she would be able to raise a small child while turning around the struggling Internet company.

“I like to stay in the rhythm of things,” Mayer said then. “My maternity leave will be a few weeks long, and I’ll work throughout it.”

Mayer Shows Her Mettle

So far, Mayer is doing a good job of answering her critics. Her son was born on September 30, and things are looking up at Yahoo as she nears the four-month mark of her tenure. Here are four things that have gone well for the company’s latest CEO:

• Alibaba deal closes: In September, Yahoo announced that it had closed its sale of half of its stake in Chinese e-commerce giant Alibaba Group. The deal, which gave Yahoo $7.6 billion before taxes, was in progress before Mayer was hired, but she made the right move in deciding to return $3 billion of the proceeds to Yahoo shareholders. In the end, she’ll still be left with about $1.3 billion to invest in new growth initiatives.

• Latest results show improvement: Excluding traffic acquisition costs, Yahoo’s revenue rose 2%, to $1.09 billion in the third quarter of 2012, topping the $1.08 billion that analysts were expecting. Search engine revenue rose 11%. Net income surged to $3.2 billion from $293.2 million a year earlier, but that included a $2.8-billion gain from the Alibaba sale.
  
  On an operating basis, and excluding the costs of Yahoo’s ongoing restructuring, the company earned $177 million, up slightly from $175 million a year ago. Earnings per share rose 66%, to $0.35 from $0.21, far exceeding the consensus forecast of $0.26. Yahoo repurchased $190 million of its shares in the quarter. It also held cash and investments of $9.4 billion, up from $2.5 billion a year ago, thanks to the Alibaba sale.

• More content agreements are likely on the way: When Mayer was hired, many worried that she would turn away from the content side of the business, which had been the focus of previous CEOs Ross Levinsohn and Scott Thompson.
  
  However, last week she signed a deal with Wenner Media that will see a significant amount of new content added to Yahoo’s sites. Under the agreement, Us Weekly and Rolling Stone will each have permanent branded pages on Yahoo’s Omg! website and Yahoo Music, respectively. In return, Omg! and Yahoo Music will have their own permanent branded pages on UsMagazine.com and RollingStone.com, as well as ad placements in the printed versions of those magazines.
  
  Deals like this are a plus for Yahoo, because they let it add more high-quality content to its sites at minimal cost.

• Tighter focus on mobile: All Internet companies are struggling with how to monetize their rising numbers of mobile users. That’s a particular problem for companies like Yahoo, Google and Facebook (NasdaqGS: FB), because online advertising supplies most of their revenue, and pay-per-click ads don’t display well on mobile devices’ small screens.
  
  The company is starting far behind Google in this respect, partly because the latter’s Android mobile operating system gives it an advantage. However, the bigger problem is that Yahoo’s mobile strategy has been unclear to this point, something that Mayer acknowledged on the third-quarter earnings conference call.
  
  “Yahoo hasn’t capitalized on the mobile opportunity,” she said. “We haven’t effectively optimized our websites, we’ve underinvested in our mobile front-end development and we’ve splintered our brands. We have more than 76 applications across Android and iOS. All of this needs to change. Our top priority is a focused, coherent mobile strategy.”

Last week, Mayer made her first deal in the mobile space, acquiring privately held Stamped for an undisclosed price. This small startup makes technology that lets users share their favorite music and restaurants on their smartphones.

Yahoo’s Longer-Term Prospects Are Improving

The Internet search market is highly competitive, and Yahoo badly trails market leader Google and Facebook. And despite her strong start, Mayer still has a lot of work ahead of her to turn Yahoo around, given the turmoil the company has faced in the last few years.

Still, its longer term prospects look brighter. What’s more, the stock is cheap in comparison to the company’s last 12 months of earnings, and its high cash holding, share buybacks and hugely popular websites and online services give it further appeal. If you’re a long-term investor who gave up on Yahoo long ago, now is a great time to take a second look at the company.

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