May 6, 2008

Yahoo! doesn’t want to be a VMware, it wants to be an Apple.

Posted in Category: Work — Amr Awadallah @ 7:32 pm | link | | comment (0)
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As an employee of Yahoo!, with a competitive gene, a part of me is sad that the Microsoft deal did not go through, since the combination of Microsoft and Yahoo! would have had much better chances at beating Google for search advertising.

That said, as a long-term share holder of Yahoo!, I am 100% supportive of this outcome, since I truly believe the offer from Microsoft undervalues Yahoo! significantly. Yahoo! has the correct plan and within a few years its true value will be unlocked. Yahoo! wants to be patient, to avoid being like VMware, and to be like Apple.

You see, in Dec of 2003 VMware agreed to get acquired by EMC for $635M in cash, the company continued to grow within EMC, and last year it was spun out in an IPO and they are now worth about $26B (of which EMC owns 90%). So the original shareholders whom sold to EMC for $635M and thought it was an excellent deal at the time, are now lamenting the fact that they did not wait for a couple of more years to realize the true value of VMware.

I feel the exact same thing happening with Yahoo!, of course a lot of execution is needed, and Google is a very tough competitor with their sights on the display advertising space, but the chances are in Yahoo’s favor. Yahoo! has many unique assets that Google is still trying to build or does not even have, this gives Yahoo! significantly more knowledge on how to sell the display inventory. Yahoo! also has a lot of experience in the display advertising world compared to Google, and that world is a very different world compared to sponsored search advertising. Yes, Google acquired DoubleClick and that will give them a decent head-start, but many of the industry practitioners would tell you that DoubleClick’s software is horrible, it is slow, clumsy, and very hard to use.

On the other hand, Apple was the number one computer company in the early 1980s, but then became a distant second once PC/DOS came out (not unlike how Google displaced Yahoo! as search leader). For over 20 years Apple was struggling to the extent that Microsoft had to help Apple with money and porting the Office Suite to MacOS, because Microsoft needed to have a competitor alive in the market to avoid anti-trust issues. But, after almost 20 years, Apple is now beating Microsoft with iPod and soon with the iPhone. Over the last five years, Apple’s stock went up from $6.6 (a $5.8B market cap) to now over $186 (a $164.5M market cap). I sure hope it does not take Yahoo! 20 years for the stock to go up like Apple’s stock did :), also the analogy to Microsoft/Apple might continue to hold if Google does indeed help Yahoo! make more money by allowing them to use their adwords marketplace.

In summary, fortune does reward the patient, and resistance is not always futile 😉

Cheers,

— amr

I replied to some of the comments on the post, and they are very relevant, so pulling up the response into the body of the post:

To “SJGMoney”: Obviously I am not implying that Yahoo will have a 30x market cap increase from here, not at all, but Yahoo can double or even quadruple from here if they execute well, which would still give them a market cap below Apple’s (Yahoo is currently $36B and Apple is $160B). On the other hand, if Yahoo gets acquired by Microsoft then no way you will see such growth, since Microsoft is already a $270B company (now that is a large number).

To “M”: A common layman mistake when looking at the P/E ratio for Yahoo is not subtracting out the part of the valuation which comes from Yahoo’s international holdings in Asia, you need to subtract *at least* $12B from Yahoo’s market cap before looking at P/E. I say at least $12B since that is value of Yahoo’s publicly traded holdings in Asia, Yahoo has other private holdings in Asia through the 39% stake in Alibaba Group that could be worth much more.

To “M” and “Roald”: Why do we tend to have such myopic memories? In 1986 when Apple was struggling, just like Yahoo is struggling now, Steve Jobs was completely side-lined and left Apple after selling all his stock (but one share), did you think very highly of him back then? Give Jerry a chance, he really loves yahoo and just wants it to succeed long-term, not unlike Jobs.

Finally to “Roald”: I agree, Yahoo was slow in ramping up the display ad business since they got side tracked with the sponsored search business (mainly Panama), that is a mistake for which Terry Semel and a couple of other executives paid the price. That said, even though Yahoo had the users and inventory for quite a while now, the advertising budgets for display ads were not growing as fast as sponsored search was, but now they are. BTW, please watch this AMP short video clip to see the cool product Yahoo is building:

http://advertising.yahoo.com/amp/

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