Is Yahoo Stock Worth Buying After Another Lukewarm Earnings Season?

After Yahoo earnings yesterday (Tuesday), investors have to ask themselves, "Is Yahoo stock worth buying?"

The Yahoo stock price got a nice lift in pre-market trading today. But Yahoo earnings weren't a ringing endorsement for the company's ailing core business.

yahoo stockYahoo! Inc. (Nasdaq: YHOO) missed on both top- and bottom-line quarterly estimates. The online search and display ad company posted revenue of $1.04 billion, against Wall Street's predicted $1.06 billion. EPS came in at $0.15, while analysts forecasted a $0.18 figure.

This now makes for declining revenue in nine of the last 11 quarters for Yahoo CEO Marissa Mayer. She took over an embattled Yahoo in 2012 and was enlisted to turn the company around. And this recent season for Yahoo earnings is further evidence that she has a long, painful road ahead of her.

So, is Yahoo stock worth buying today?

Is Yahoo Stock Worth Buying? Not for This One Reason

In answering the question, "Is Yahoo stock worth buying?" you first have to consider Yahoo's core business model.

Yahoo has two main drivers of revenue, both of which focus on selling online advertising space. Yahoo will sell ads against searches and against content. In 2014, Yahoo's search revenue raked in $1.8 billion. Its display ads - ads placed on Yahoo's content (News, Sports, Finance, etc.) - totaled $1.9 billion in revenue.

So, why is Yahoo trouble?

It's because selling online ads is a tough business. To excel in it, these companies need to provide an intriguing reason for advertisers to sell on their platform. Yahoo has, for a long time, been asleep at the wheel.

Google Inc. (Nasdaq: GOOG, GOOGL) is the undisputed leader in generating ad revenue from search.

It has, over the years, created the most innovative algorithms and built up the most trusted brand name. It has a market share in search of around 74.8%, according to StatCounter. Pound for pound, Google is infinitely superior in search to Yahoo. Yahoo has little chance of cutting into Google's share of ad dollars in that space.

Then there's Facebook Inc. (NYSE: FB). Facebook got out in front of the growth of social media in the mid-2000s and now has about 1.4 billion daily active users on its platform who are highly engaged. It's created an innovative way to sell ads that are seamlessly integrated into its social media interface. It's done so well that it's been eating up a lot of ad dollars that could otherwise go to Yahoo's display business.

On both fronts, Yahoo really doesn't stand a chance. Just look at the current make-up of the market. In 2014, Google was the unquestionable leader in its share of global ad revenue dollars. The search giant generated $59.1 billion. Facebook came in second at $11.5 billion. Yahoo wasn't even third with its $4.6 billion figure. It trailed even Chinese search engine Baidu Inc. (Nasdaq: BIDU), which generated $7.8 billion.

What's even more telling is the growth. In 2009, Yahoo's share of the global ad revenue came in at $5.7 billion. That means that over the last five years, Yahoo's ad revenue has fallen 18.6%. By comparison, Google's has grown 158% from $22.8 billion in 2009. Facebook's has grown more than 1400% from $764 million in 2009.

Plain and simple, Yahoo hasn't found a way to revolutionize selling ads in the digital space, while its competitors have.

And Mayer's turnaround strategy is not showing much promise.

Mayer has a few goals for Yahoo. And to her credit, she's identified these right areas for growth...

She wants to compete on mobile ads, which Bloomberg predicts will be a $32.8 billion market in 2015.

She also wants to make Yahoo a competitor in selling online video ads. This is predicted to be a $5.2 billion market in 2015. It was $4 million in 2006.

Yahoo has made several acquisitions to help this goal, and has beefed up its content offerings in pursuit of it. But at this point, it all seems fruitless.

On mobile, Google already holds a 90% market share in search, according to Trefis. And video ad space may be the new frontier in online advertising, but if advertisers don't want to buy ads against Yahoo content, Yahoo simply falls back into the same trap it's been in over the last six years.

So, is Yahoo stock worth buying? Not if you're investing in Yahoo for its future in search and display.

But YHOO still is worth a buy right now. Here's what Yahoo earnings did reveal...

Why Is Yahoo Stock Worth Buying?

Yahoo stock has risen more than 200% under Mayer. But it's no secret that Yahoo's biggest asset had for that whole time been its large stake in the growing Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE: BABA).

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That stake was purchased in 2005 and over the last decade has been strategically sold off in increments, with the windfall largely being returned to Yahoo shareholders, and Yahoo now holds 383.5 million shares in the company. Those shares are worth about $31.6 billion.

The main allure of Yahoo stock for a while has been that the company is going to sell that huge BABA stake and return a huge chunk to shareholders. And after announcing a tax-free spin-off of that stake set for the fourth quarter this year, it's also going to be a tax-efficient sale that maximizes the stake's value.

But Yahoo also holds a 35.5% stake in another Asian property: Yahoo! Japan. Yahoo! Japan is actually the most popular search engine in that country, eclipsing even Google. Yahoo's two billion shares in its Japanese counterpart, after accounting for currency translation, are worth around $9 billion.

It's been clear since January that Yahoo is going to spin-off its Alibaba stake. And shareholders hardly seem interested in where the core business is going. They want to squeeze all the shareholder value they can out of Yahoo while they can.

And the last true remaining source of worth for the company is Yahoo! Japan.

Yahoo addressed Yahoo! Japan yesterday in their earnings call, but it was little more than a nod to the fact that activist shareholders are hounding them about it. But it's going to be the focus of Yahoo in the coming months.

The Bottom Line: Yahoo is folding to the pressure. They're going to have to answer for Yahoo! Japan in the same way they had to answer and deliver on a tax-free spin-off for Alibaba. The core business is as uncertain as it ever was. And the challenge of competing for ad dollars may be insurmountable for an obviously ambitious Mayer. But, is Yahoo stock worth buying? Yes, but only on the windfall gains activist shareholders are going to force out of Mayer & Co.

Just How Valuable Is Yahoo! Japan to Yahoo? Absent Alibaba and its Japanese property, you'd be surprised at exactly how the market is pricing Yahoo's core business. We break that down here...