Why YHOO Will Outperform GOOG in 2007
I was on CNBC tonight making the bullish case for Yahoo: — Yahoo needs to grow earnings faster than Google to regain investor interest — It can do that by cutting costs, growing audience, acquisitions or improving monetization (or some combination of all four)
Context & Ripple Effects
Kedrosky's CNBC bull call arrives nearly a year after rival executives openly trash-talked Google's growth prospects, so the contrarian-Yahoo trade he is pitching has been building all year rather than appearing from nowhere. His thesis is mechanical: Yahoo needs to grow earnings faster than Google to regain investor interest, and it has four levers — cost cuts, audience growth, acquisitions, and improved monetization.
The supporting evidence in play this week cuts both ways. Yahoo attributes its weak page-view counts to its AJAX redesign rather than audience loss, while the rumor mill has Google's grip on Valley talent loosening as stock-option bait loses pull — unconfirmed, but a potential tailwind for Yahoo recruiting. Meanwhile Google keeps buying distribution beyond search, having completed the dMarc Broadcasting radio-ad acquisition earlier in 2006 and now updating advertisers on its radio rollout; chatter about a network joint venture first surfaced alongside news of the planned YouTube purchase, though that remains just rumor.
First-order effects
- Yahoo's investor narrative shifts from defending page-view declines to demonstrating earnings acceleration, forcing management to show progress on at least one of Kedrosky's four levers — most immediately, cost discipline.
- Google enters 2007 carrying elevated expectations against which 'outperform' will be judged, with its off-search bets like the dMarc radio business read as evidence of whether growth can extend past search.
Second-order effects
- If Yahoo pursues acquisitions to close the gap, it becomes an active bidder in a market where Google is simultaneously spending on distribution assets like radio, pushing up prices for ad-network and audience properties both firms need.
- The rumored softening of Google's stock-option lure, if real, would lower Yahoo's cost of hiring the engineering talent its product turnaround requires — though the claim remains unconfirmed.
Third-order effects
- The comparison reframes how the market values portals: per-page monetization and earnings growth displace raw audience size as the metric, and any company that cannot close the monetization gap with Google becomes structurally cheap — and therefore a candidate for consolidation.
- A sustained Yahoo-versus-Google performance race would keep Wall Street pressure on both firms to buy growth rather than build it, making large-scale M&A the default strategic response across the portal sector.
The trend: Web-advertising value is migrating from audience scale toward per-impression monetization, with Google's paid-search economics setting the bar that portals like Yahoo must either meet through restructuring or become targets within.