Back in 2004 the commonly held wisdom was that Yahoo’s prospects were much brighter than those of Google. It’s hard to imagine now but every article mentioned the ‘diversity’ of Yahoo’s revenue streams which came from multiple streams of advertising and also fees. Terry Semel, the company’s former CEO, used to tout how he was going to make Yahoo a more balanced company with fee revenue (never mind they used to count Hotjobs under fees, which was misrepresenting the line item).
I thought to myself back then that if I bought Google stock and shorted Yahoo stock it would capture how I felt about that commonly held wisdom. If they both went down, then Yahoo would go down more. If they both went up, Google would surely go up more in my mind. I didn’t make that trade and so all you have is this pathetic blog post where the greatest trader Wall Street has ever seen, “Should’ve”, is featured.
I think I’m ready to make another pair trade and one grand headline-grabbing statement: That AOL ($2.9bn) will be worth more than Yahoo ($22bn) in 5 years. The trade, buy AOL, short Yahoo, makes money even if AOL doesn’t surpass Yahoo’s market value, of course.
My main reason for thinking this is that AOL has a management team that is in tune with the reality of the Internet. Yahoo has a management team still grasping with the basics of advertising and that’s not mentioning the basics of online advertising.
Now reality is a crushing thing and another reason I think the trade makes sense is that AOL is at such a down-trodden, expectation-crushing valuation. But Tim Armstrong recognizes the reality of online advertising. Specifically that reality is not about whether Coke or some other company like Proctor & Gamble will reallocate TV dollars to the Internet. Rather, it’s about whether the hair loss treatment product gets sold or someone fills out a life insurance quote or enrolls in an online degree to further their education.
Search is completely direct response. Display, I believe, is nearly a majority tied to direct response goals (on 80%+ impressions) and the powerhouse that will completely capitulate display into a direct response medium is Facebook. Eric Eldon of InsideFacebook took a deeper dive into Facebook’s revenue for 2009 in an excellent look at the company’s prospects. There are only two line items that matter: The self-service direct response ads and the tax on virtual currency (aka Facebook Credits). I think Eric’s total estimates are right but I would be highly surprised if brands were even close to that and the direct response ads are understated.
Back to Yahoo/AOL. Of the two AOL is the only one that recognizes this reality. Yahoo’s misunderstanding of the market as a whole (crippling of Right Media, not opening up their entire inventory to the Exchange and taking the pain head on) doesn’t stop there. Carol Bartz, who I am sure is an excellent manager of large companies, seems lost. See Arrington’s article on a speech she gave recently where she said: “she’s counting on an improvement in the economy to drive Yahoo growth”.
Well, let me save you some time Carol: Stop counting. The economy won’t help you. In case you hadn’t realized, people don’t have jobs and they haven’t had jobs for the longest time on record. They’re underwater on their house and they’re leveraged to the hilt.
The second thing that enrages me about that statement is that it’s completely out of her control. And what track record does Bartz have in forecasting economic indicators? Where are the statements related to things under her control? Bueller?
She mentions that she thinks AOL is a ‘mini Yahoo’. Yeah right. Maybe www.aol.com and www.yahoo.com but that in no way refers to NASDAQ:YHOO and NYSE:AOL.
Don’t get me wrong: Yahoo has had a tremendous rise as a company and there is at least 10 years of slowing riding the slope downwards as a profitable enterprise. But there is zero evidence of the company acknowledging reality (OK wait, they did do something brilliant recently and let search bidders bid by domain. And now: They are shutting that down when they hand over to Microsoft. Great job guys.)
The scenario that will allow AOL to rise once more and to Yahoo completely miss the opportunity is the fact that the strategy is completely unpopular. There will always be some pompous journalist who can find a poorly-written article about some obscure topic that Yahoo executives who read it can snicker at and offer up a witty reply about how they don’t think articles about ‘removing fleas on dogs’ is a big business. They then will be able to talk about a deal they have with Ben Silverman (he made TV shows!) that even in the miniscule chance that it does turn out, they’ll have to pay all the profits to Ben rather than keeping them for Yahoo shareholders.
Of course, they will be dead wrong. And that’s why I think AOL will be able to surpass Yahoo in market value in the next five years.
