Companies engaged in information technologies business tend to become the most profitable and rapidly developing ones. Financial analysis is highly important for such companies because the environment changes quickly, new technologies and competitors emerge, and the whole worldwide IT structure is a highly dynamic one.

This essay is aimed to discuss Yahoo! Inc. ”“ one of the most know web portals which annually attracts around 1575 billion visitors and is ranked as the second most often visited site in the US and worldwide. Yahoo offers a great number of services but significantly loses over his main competitor ”“ Google. The aim of this essay is to analyze strategies and perspectives of Yahoo and give financial recommendations for the company.

1. Company description

Yahoo was established in 1995 and started as Internet service provider. In 1997 it launched its search engine and web-based e-mail services and during the next decade has offered a great number of various products and sub-sites such as multimedia content networks, specialized search engines, various software, web mapping, different online editing possibilities etc. Yahoo currently has around 500 million users every month and provides multilanguage interface. On one hand, lots of visitors and gained popularity allow Yahoo to earn enough finance with the help of contextual advertising; on the other hand, the large network of portals (it can be divided into Front Doors, Communities, Search, Communications, Audience, and Connected Life) does not necessarily mean quality of these services.

2. Financial analysis

According to google.finance.com, the financial situation of Yahoo is the following: total revenue comprises 7,208.50 million dollars, gross profit – 4,185.14 million dollars, and net income – 424.30 million dollars. The comparison of Yahoo financial results of 2007 and 2008 years show that net profit margin has decreased by 2.32% and return on average assets has fallen by 1,29%. However, the operating margin rose by 0.18%, EBTD margin ”“ by 11.14% and return on average equity has also increased by 4.08%. Trailing P/E and forward P/E constitute 49.08 and 32.91 correspondingly. Profit margin is 5.89% and operating margin is 8.43%. Return on equity is 4,08%; EPS equals to 0.30; the question of dividends is not applicable for Yahoo; cash per share is 2.476.

Yahoo has offered strategic partnership to many companies and this is one of the main revenue sources for Yahoo: partners usually pay to have their service included in the Yahoo directory in one form or another (Fridson & Alvarez 2002, p. 39). Banner placement and collaboration with advertising companies also creates for Yahoo a source of income.

The strategy of Yahoo is quite reasonable and their sites are the most trafficked on the planet. Lots of advertising and partnership programs are showed at sites participating in the Yahoo network; however, the company receives profit of advertising that is placed within its own network, and this is the weakest place. For instance, Google still has the biggest revenue among web services ”“ one of the reasons for this is that Google’s ads in a majority are shown on partner sites .

Also, though Yahoo has wide network and lots of services, the quality of these services sometimes doesn’t correspond to high standards of nowadays; for example, Yahoo search engine is weak in its efficiency; so do some other products. Therefore, Yahoo loses quality in the look for quantity, and this is a negative tendency for the company.

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3. Equity valuation

Let us analyze the financial results of Yahoo!: the company’s P/E is rather high (especially compared to Google, the main competitor of the company; P/E of Google comprises 28.84).  Profitability of the company is shown by the following table:

Yahoo! growth has been rather quick (which is illustrated by the graph below).

However, regarding Google’s financial results and financial graph, one can witness extreme growth and even outburst of the company’s success:

Therefore, the Yahoo! company should not only manage to be efficient at the market itself, but has to act better than the competitors (Jain 2004). There are several causes for concern, namely: ROE has reduced for several years compared to previous Yahoo! figures and earnings before tax have decreased as well. The positive tendencies can be seen in research and development increase. However, the quickly adapting and changing Google, as well as other competitors of Yahoo such as AOL, Microsoft and others form a strong competitive environment where active innovation and attention to customers as well as creative ideas are necessary for surviving.

So, what are financial advantages and disadvantages that Yahoo needs to take into account and analyze in order to return its first place among web portals? Nowadays the company is losing because of market capital (second place in the industry), gross profit margin and ratio are also showing the loss of Yahoo! to competitors. However, internet industry offers great growth potential. The sphere of search engines and web advertising is not so easy to enter for new companies because Google and Yahoo! are core players in this field and their scale is hard to reach.

Conclusion

The main source of worries for Yahoo is its financial health and market position: the emergence of Google and its open strategies have dramatically changed competitive situation and caused financial flow-outs from Yahoo and other companies operating in this sphere. Also, Yahoo network needs to be restructured and services should be improved in order to attract more client and visitors. The complexity of the interface also acts as a negative factor for Yahoo. In general, the company has faced an unexpectedly strong competitor after years of being number one at the market and therefore needs the changes in the strategy: the company needs to refine its search algorithm and to optimize advertising and partnership programs. In terms of buy/hold/sell analysis we can make a conclusion that the company needs to hold its position and try to improve it.