Yahoo's lagging growth a cause for concern

Yahoo's lagging growth a cause for concern

CHAMPAIGN – To former Motorola employees in Champaign whose livelihoods were saved by Yahoo, the Internet giant looks like a white knight.

But to analysts and investors across the nation, the Sunnyvale, Calif.-based company appears to have tarnished armor.

Their chief concern: sales growth that fails to keep up with archcompetitor Google.

Just three weeks ago, Yahoo stock slumped to its lowest point of the year. It traded for $22.27 a share on Aug. 29 after trading for as much as $33.61 a share in May. The stock rebounded to the $23 to $24 range last week.

In June, Terry Semel relinquished his position as Yahoo's chief executive officer but retained his title as chairman. Succeeding him as CEO was Jerry Yang, who co-founded the company in 1995 with David Filo.

Since the succession, the company has undergone further reorganization. But Troy Mastin, who covers Yahoo as an analyst for William Blair & Co., said he has seen no meaningful change yet.

Mastin said Yahoo's performance has been "a disappointment to Wall Street."

"Its growth has slowed more rapidly than Google's has," he said. "Probably the biggest criticism of the company has been its slow reaction to the emergence of social media and video."

Yahoo made some acquisitions and enlarged its offerings in some growth areas of the Internet, but the moves have "met with limited success," he said.

In fact, Yahoo is considered a takeover target because it's lost ground to Google, Mastin said.

"The most likely buyer has been Microsoft, but there are others that might be reasonable – a phone company or a cable company or a larger traditional media company," he said.

Jackson Securities put a "sell" rating on Yahoo stock earlier this year when takeover speculation first arose. But Jackson recently raised the rating to a "hold," said Brian Bolan, the company's Chicago-based director of research.

"We felt like the valuation was good," he said.

Bolan said although takeover speculation has heated up again, he doesn't see a sale happening – at least for a number of years.

Yahoo is focusing on improving content, and its recent purchases of Right Media, an online advertising exchange, and BlueLithium, an advertising network, don't particularly square with prospects of a Microsoft acquisition, he said.

However, there are other companies, including eBay, that could be interested in acquiring Yahoo, he said.

Bolan said the fact Jerry Yang is back as CEO indicates he "wants to run the company and do something different."

"If they were going to sell it, they would have made a deal a few months back," he said.

Bolan said Yahoo lost ground to Google because Google's "core technology, especially in search, is far superior to that of Yahoo." It produces search results more relevant to the user, so Google accounts for about two-thirds of searches, he said.

But Yahoo also has some advantages over Google, Bolan said.

"It definitely has more users of its e-mail system compared to (Google's) Gmail. That's a core product on the Internet," he said.

Plus, there are more Yahoo-owned sites than Google sites, and those get visited by users more frequently than Google does, he said.

Bolan said the most noticeable change since Yang became CEO is Yahoo's focus on content. He said Yahoo recently agreed to buy the Rivals.com online sports site and add it to Yahoo Sports. The company also launched Yahoo omg!, a portal that has become the No. 1 celebrity news site, outpacing E! Online, he said.

Yahoo broadly defines itself as a company that connects people with knowledge and their community.

Its business is divided into five categories: "search," "marketplace," "information and entertainment," "communications, communities and front doors" and "connected life."

On Aug. 3, Yahoo announced it would open a technology center in Champaign-Urbana, employing more than 100 people who formerly worked for Motorola.

Motorola's software development center on the north edge of the University of Illinois Research Park closed Aug. 24, putting an end to 183 jobs. But many of those people reported to work at Yahoo the very next week, attending orientation meetings at the Champaign Country Club and getting a surprise visit from Yahoo co-founder David Filo.

The new Yahoo employees in Champaign will work closely with Yahoo research teams in Sunnyvale and Burbank, Calif. They'll focus on infrastructure technologies related to operating systems and advertising products.

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