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Battle of the Valley’s Internet Giants: Google Versus Yahoo

Oct. 23, 2012
Investing, Investments
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It really is the tale of Silicon Valley in a nutshell.  Two tech giant stocks, Yahoo (YHOO) and Google (GOOG), were both initially founded by graduate students at Stanford University; since then, each company has had its time in the limelight of the World Wide Web. At the beginning, Yahoo (YHOO) was hitting records with its Internet growth and stock performance. However, the dot-com bubble burst and the stock hasn’t been able to recover to its previous levels. As for Google (GOOG), it has been the story of the past decade.

Search Markets Snapshot: Google Dominates

Yahoo has 700 million unique monthly visitors, which doesn’t nearly match Google’s over 1 billion unique monthly visitors. But it is in the explicit core searches that Yahoo is found wanting with its 2.6 billion number: a far cry from Google’s 12 billion.

Google dominates the search market and will likely continue to do so for some time.  Is Google’s dominance unsurpassable? Can Yahoo even come close to competing with Google ever again, and is that even what Yahoo should try to do?

Yahoo v. Google By the Numbers: Earnings and Stock Comparison

Google suffered a glitch last week when it came to issuing its earnings report early, that wiped out $20B of its value. On the other hand, Yahoo has managed to come out on top this past week, sharing its earnings report after the stock market closed yesterday. The earnings report bodes well for the Sunnyvale, CA based firm; Wall Street has rated Yahoo as a ‘buy’ and upped its price target to $22.

Having recently celebrated its fourteenth anniversary (a rarity in the tech world), Google had great prospects with many Wall Street analysts expecting the stock to hit $800 per share. This was before the earnings report debacle that sent the stock tumbling to $587 a share. It has been hovering around there since, and investors are confused about what to do.  The problem is compounded with Google’s earnings report missing Wall Street targets. The Earnings Per Share (EPS) is $1.63 lower than Wall Street estimates and the revenue missed by $530M. It has been a hard week with the Dow losing 200 points because of disappointing Q3 earnings reports from McDonald’s (MCD), Microsoft (MSFT) and General Electric (GE).

The hiccup that sent traders into a frenzy was blamed on Google’s printer R.R. Donnelley. Interestingly, Yahoo and Facebook (FB) stocks fell as well. Yahoo shed 1.5 percent, but it has risen 4 percent due to the strong earnings report. It was mainly due to the Ali Baba sale that netted Yahoo $2.8 billion that saw net income reach $3.16 billion trumping Google’s net income of $2.18 billion in the last quarter.

Nonetheless, Yahoo is clearly not a hot stock like Google. Google’s EPS of 31.92 is almost 10 times Yahoo’s EPS and even the P/E of 5.05 is not as impressive as Google’s 21.43. Additionally, Yahoo does not even feature in the high growth smart phones and tablets market discussion with its Silicon Valley peers Apple (AAPL) and Google leading the way here.

Is Yahoo Making Moves for a Turnaround in 2013?

For better or for worse, Yahoo is copying the Google playbook; free meals and iPhones for employees.  Yahoo is also powering its search results in the U.S. with Microsoft’s Bing, a search engine that has been increasing its market share and becoming a real alternative to Google in its core business of web search.  Things are also looking up for Yahoo and it has a pile of cash at its disposal after it sold its stake in China’s AliBaba Group.

Yahoo has even brought in Marissa Mayer as President and CEO in a bold move that’s been in the news for months. Mayer was employee number 20 and the first female engineer at Google when she joined the company in 1999.  She was instrumental in luring Henrique de Castro – another star Google employee –to be Yahoo’s COO starting early next year.

As for the move to mobile devices, CEO Mayer stated that smartphones are being used to check weather, read news and financial information, watch videos and play games. So Yahoo is definitely poised to capitalize along with Google.

There is also growth in its joint venture in Japan with Softbank Corp. Yet, there are reports that Yahoo could sell its 35 percent stake in Yahoo Japan to raise more cash.

The Final Say: Root for the Underdog?

Yahoo is clearly the underdog, but both firms have premium brand recognition as search engines even though Google has the edge. They also have great fundamentals that make them good long-term stock picks.  While Google has been making headlines for all the wrong reasons the last few days, investors should not discard all the extremely positive news that has come to pass with the Mountain View, CA tech giant. It recently had its 25 billionth android app download too.

The question with Google for investors is whether the stock’s decline is something like that of Apple or is it a sign of things to come. Google is a search company, but its core business is weakening and its expensive acquisitions (Motorola Mobility) haven’t exactly paid off. It has also been hurt by the move to exit the Chinese market in early 2010.

Yahoo may have had a better Q3 earnings report, but short-term traders and long-term investors will still fancy their chances with Google stock.