Yahoo! Inc. (YHOO), the biggest U.S. Web portal, rose to a five-year high after reporting that the value of its stake in Chinese e-commerce company Alibaba Group Holding Ltd. surged in the first three months of the year.
Shares of Yahoo gained 9.2 percent to $29.34 at 3:24 p.m. in New York for the highest intraday price since May 2008. Yahoo, which has a stake of about 24 percent in Alibaba, said yesterday that the Chinese company’s profit tripled in the first quarter.
Alibaba’s results are bolstering Yahoo shares as Chief Executive Officer Marissa Mayer, one year into her tenure, remains in the early stages of a turnaround centered on creating new products aimed at luring consumers and advertisers from Google Inc. (GOOG) and Facebook Inc. (FB) Most of Yahoo’s gains in the past year were driven by the appreciation of its stakes in Alibaba and Yahoo Japan Corp. (4689), according to Mark Mahaney, an analyst at RBC Capital Markets.
“Alibaba is showing a lot of operating leverage,” Sameet Sinha, a San Francisco-based analyst at B. Riley & Co., said in an interview. “They built this huge marketplace in China and they started charging people. All of a sudden this is falling straight to the bottom line.”
Yahoo’s second-quarter profit excluding some items was 35 cents a share, the Sunnyvale, California-based company said yesterday. Analysts had projected, on average, profit of 30 cents. Yahoo made $225 million in earnings in the quarter from its equity interest in both Alibaba and Yahoo Japan, up from $180 million in the same period last year.
Alibaba tripled its net income in the first quarter of this year, to $669 million from $220 million a year earlier, Yahoo said yesterday on its website. The Hangzhou, China-based online marketplace may hold an initial public offering by the end of this year.
The Asian assets also gave Yahoo an opportunity to hedge against the declining value of the Japanese yen. Yahoo added $243 million in cash primarily from the increase in value of this currency hedge, the company said. In May, Yahoo said it recorded a pretax gain of $270 million in the first quarter of this year and $3 million last year after using forward contracts to lessen foreign-exchange risk related to its stake in Yahoo Japan.
Yahoo’s sales for the current quarter, excluding revenue passed to partner sites, will be $1.06 billion to $1.1 billion, the company said on its website yesterday. Analysts were projecting revenue of $1.12 billion, the average of estimates compiled by Bloomberg. Second-quarter sales fell 1 percent to $1.07 billion, also missing analysts’ $1.08 billion prediction.
While Mayer’s efforts have added users, investors expecting advertising revenue from Yahoo will have to be patient, said Paul Sweeney, an analyst at Bloomberg Industries.
“Marissa’s investments in product are a long-term play to drive user engagement and hopefully revenue growth,” Sweeney said. “Judging by the company’s guidance, these investments clearly will have little to no near-term benefit.”
Yahoo’s share of the $17.5 billion market for display ads, its core business, will slip to 7.9 percent in 2013 from 9.2 percent last year, estimates researcher EMarketer Inc. Google will climb almost three percentage points to 18 percent, while Facebook will increase about two points to 17 percent, EMarketer said.
Yahoo’s sales of display ads decreased 12 percent to $472 million in the second quarter. That was driven in part by advertisers paying lower prices per promotion, as marketers shift away from buying the large-format graphic ads that Yahoo specializes in, according to Colin Gillis, an analyst at BGC Partners LP in New York, who rates the shares hold.
Net income attributable to Yahoo rose 46 percent to $331.2 million, Yahoo said.
Mayer described her turnaround plan as a “chain reaction” of steps that will eventually lead to sales growth.
“Hire and retain a great team; build inspiring products that will attract users and increased traffic; that traffic will increase advertiser interest and ultimately translate to revenue,” Mayer said on yesterday’s call, which was broadcast via video on the Web. “People, then products, then traffic, then revenue.”
Yahoo lowered its forecast for 2013 sales, excluding revenue passed to partner sites, to as much as $4.55 billion. That’s lower than the $4.6 billion it said was possible in April, and the company predicts only a slight improvement over last year’s $4.47 billion.
“We could have another year of absolutely no growth,” Sinha said.
Mayer has embarked on a shopping spree that comprised at least 18 companies, including her $1.1 billion purchase of blogging platform Tumblr Inc., as well as mobile-application makers Stamped Inc. and Jybe Inc. and Summly Ltd., the news-reading application created by teenager Nick D’Aloisio. Earlier this month, Yahoo paid about $70 million for Xobni Corp., a maker of contact-management software, two people said at the time.
The company today said it acquired Admovate, a startup that makes technology for buying and selling mobile ads. Admovate’s team of four engineers has joined Yahoo to help with its efforts around making money from ads shown on smartphones and tablets, Scott Burke, senior vice president at Yahoo, said in an interview.
“Now that we’re seeing some good traction there, the second phase is to grow the advertising revenue in mobile,” said Burke, who would not comment on terms of the deal.
Yahoo repurchased 25.3 million shares of stock at an average price of $25.76 for $653 million in the second quarter.
Shares of Yahoo are now approaching $31, the price at which Microsoft Corp. offered to buy the company in 2008. Yahoo rejected the bid, even after Microsoft raised its offer to $33 per share. Because of a smaller number of shares outstanding, Yahoo’s market capitalization is currently about $31.8 billion - - far from the $47.5 billion total offered by Microsoft.
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