It’s been one year since Marissa Mayer assumed command of Yahoo, and there’s no doubt that she’s injected new energy into the purple-hued Internet pioneer. Mayer has revamped many of Yahoo’s core products, like Flickr, embarked on an ambitious acquisition spree — including the blockbuster $1.1 billion purchase of Tumblr — and returned hundreds of millions of dollars to shareholders. Perhaps most important, Mayer has rejuvenated esprit de corps among the company’s long-suffering employees.
But Yahoo’s turnaround remains very much a work in progress. Although Yahoo’s stock price has soared by a whopping 73% since Mayer become CEO, that gain is almost entirely attributable to investments the company has in two Asian companies, the Chinese e-commerce giant Alibaba and Yahoo Japan. Yahoo’s core advertising business remains sluggish amid intense competition from rival Internet giants like Google and Facebook.
Given the disastrous shape Yahoo was in when Mayer took over as CEO, her most important accomplishment over the past year may simply have been to get people talking positively about Yahoo again. After all, for many years when Yahoo came up in conversation, it was typically to discuss what a train wreck the company had become. For nearly a decade before Mayer arrived, Yahoo was plagued by missed opportunities, poor execution and a series of failed chief executives.
Yahoo’s stock gain has given Mayer time to work with, but eventually she is going to have to show real progress in turning around the company’s business. Yahoo’s revenue only increased by 2% last year. “Marissa has given people hope and bought some time to rethink the company,” Scott Kessler, head of technology research at S&P Capital IQ, tells TIME. “But at some point Yahoo is going to have to move from a company perceived for its prospects to a company perceived for its performance.” Yahoo reports second-quarter earnings today after the stock market closes.
In some ways, Mayer has been the beneficiary of savvy investments that company co-founder Jerry Yang made many years ago, particularly in Alibaba, which is sometimes referred to as the Amazon of China. Yahoo owns about 25% of Alibaba, and Colin W. Gillis, a technology analyst at BCG Financial, estimates that Yahoo shares reflect a valuation for Alibaba in the $60 billion to $70 billion range. Alibaba is said to be gearing up for an initial public offering, possibly by the end of this year.
Kessler estimates that Yahoo’s investment in Alibaba and its 35% stake in Yahoo Japan account for no less than half of Yahoo’s current market capitalization of $30 billion. He says Yahoo’s massive stock gain over the past year doesn’t reflect the underlying performance of the company’s core business, but it has bought Mayer more time and kept investors happy, at least for now. “Most of the enthusiasm about Yahoo’s stock price is a reflection of the company’s investment in Alibaba and Yahoo Japan,” he says.
Back home at Yahoo headquarters in Sunnyvale, Calif., Mayer’s challenges are considerable. Mayer has spent a lot of time and money to enhance the company’s content offerings, like news, finance and sports, and she’s made improving the user experience of Yahoo’s e-mail and instant-messaging products a top priority. In May, Mayer unveiled an impressive revamp for the company’s Flickr photo-sharing service, which had languished during years of neglect.
The problem is that Yahoo has become a “no-to-slow growth” company in terms of its core advertising business, according to Kessler. “Yahoo has a global name, global reach and a ton of users, but growth is really limited because people are doing so many different things on the Internet now, especially in the mobile space,” Kessler says. “People are simply spending less time on Yahoo properties.”
Yahoo’s share of consumer time spent in the sports, news, finance and entertainment categories is declining, according to Brian Nowak, an analyst at Susquehanna Financial Group, with news and sports posting the most severe drop-offs. Moreover, demographics are working against Yahoo, because 80% of Yahoo’s growth — such as it is — is coming from users who are 45 and older. And in the mobile space, Yahoo lags its competitors in most of the major content categories. “Yahoo needs to address its user offerings in these verticals if it hopes to reaccelerate its display-ad-dollar growth,” Nowak wrote in a recent research report.
Doug Anmuth, a technology analyst at JPMorgan, estimates that Yahoo’s display-ad revenue will decline 11.7% this quarter compared with last year, and will continue to be negative or in the low single digits until 2015, as the company rebuilds its battered ad-sales team. “We expect display to remain soft as Yahoo’s sales restructuring could take time to ramp, competition is increasing, and the company has reduced some inventory on the home page and in e-mail,” Anmuth wrote in a note to clients last week.
The mobile space has been a particular challenge because, unlike rivals Apple and Google, Yahoo doesn’t have a mobile operating system, a mobile browser or a mobile device of its own. It doesn’t even have a mobile “super-app” like Facebook Home. So it’s no surprise that Mayer has made mobile a top priority, and most of the 17 acquisitions she’s made so far have had some mobile angle, including Summly, the mobile news app created by 17-year-old Nick D’Aloisio. Many of Mayer’s acquisitions were so-called acqui-hires designed to bring onboard talented engineers who will build the next generation of Yahoo’s mobile products.
Mayer’s biggest deal, of course, was the blockbuster $1.1 billion buyout of New York–based social-blogging platform Tumblr, which was announced in May. That deal was widely viewed as an attempt by Yahoo to increase its “coolness” factor, because Tumblr is extremely popular with young urbanites, particularly in the highly coveted 18-to-24-year-old demographic. Indeed, Tumblr has become a cultural phenomenon, with over 100 million intensely loyal users reading and posting on over 100 million blogs each month.
But the Tumblr acquisition carries obvious risks for Yahoo, not least of all because the company reportedly only booked a measly $13 million in revenue last year. “The Tumblr deal struck me as pretty aggressive from a valuation point of view, and at some point they need to start wringing value out of that asset,” says Kessler. That could pose a challenge, especially if Mayer makes good on her pledge to take a hands-off approach to Tumblr, which has long resisted in-your-face advertising. “There could be some tension,” Kessler says. “On the one hand Yahoo says it’s going to let Tumblr operate independently and stay true to its roots, but on the other hand, Yahoo is going to need to start monetizing that asset.”
When Mayer took over as Yahoo CEO one year ago, she made clear that turning around the company would take years of hard work. She’s moved aggressively to improve the company’s products and generated buzz with splashy acquisitions. She’s improved company morale. And from Wall Street to Silicon Valley, there’s a feeling that people are hoping for her to succeed. Indeed, it’s hard to imagine that there are many tech executives more qualified to pull off this turnaround than Mayer, an accomplished engineer and self-proclaimed “geek” who was Google’s 20th employee. Thanks to Yahoo’s Asian investments, Mayer still has time on her side. But on Wall Street, as in Silicon Valley, neither time nor hope lasts forever.