Marissa Mayer Doesn't Have To Worry About Yahoo's Imploding Core Business
There was one big difference between this phone call and the other two, however.
This time, Yahoo's results were lousy.
Mayer reported that during the first three months of this year, Yahoo generated much less revenue than most Wall Street analysts expected.
Then Yahoo's CFO, Ken Goldman, got on the line and said something even more dispiriting about Yahoo's core business.
He said that during the quarter, Yahoo sold 7% fewer ads than it did during the same period a year ago, and that it charged 2% less for them.
Worringly, Goldman said the reason Yahoo sold fewer ads was that there was too little "supply."
The amount of "supply" in an online advertising business like Yahoo's is the number of times Yahoo Webpages or Yahoo apps with ads in them are opened.
Goldman said: "Supply has been the main driver for the decline in number of ads sold, as it follows the overall user engagement trends."
In normal-people speak that means: Yahoo sold fewer ads because people are using Yahoo products less, so there are fewer ads to sell.
The fact is, Yahoo's core business is eroding quickly.
People who care about Yahoo's core business are very alarmed.
Late last night, we got an email from a former Yahoo executive who still owns a lot of stock. This source was disgusted with the results, and wrote, "Employees have had it and are leaving in droves. There will be no competent folks left by fall."
Mayer, said this source, "best get a plan and start 'earning' or she will not make the Christmas break."
But here's the thing about Yahoo's first quarter results, its eroding display advertising business, and even Marissa Mayer's performance so far at the company:
In the big picture, none of it matters ... not to Yahoo's biggest shareholders.
What matters to them is that Yahoo is a major shareholder in two incredibly high-performing Asian Internet companies: Yahoo Japan and Alibaba.
(These stakes are thanks to brilliant side bets made by Yahoo co-founder Jerry Yang years ago.)
Yahoo's 24% stake in Alibaba is particularly valuable to Yahoo shareholders.
Alibaba is a huge Chinese Internet e-commerce company that continues to grow at an insane pace.
Last summer, Alibaba was worth about $40 billion. Today, analyst Carlos Kirjner of Bernstein Research says it's worth at least $50 billion — and maybe as much as $75 billion. (JP Morgan's Doug Anmuth says $55 billion to $65 billion.)
Obviously, investors around the world would love to invest directly in a company that is growing so fast in a market as huge as China.
But right now, that's hard to do. Alibaba is a private company.
That makes owning Yahoo stock the easiest way for an investor to get exposure to Alibaba.
Betting on Alibaba by buying Yahoo stock even has a built-in payday.
Yahoo and Alibaba struck a deal last year in which Yahoo promised Alibaba that if it went public before 2015, Alibaba would have the right to buy half of Yahoo's 24% stake.
At today's $50 billion valuation for Alibaba, that would mean an influx of $6 billion for Yahoo. At a $75 billion valuation or higher, Yahoo nets $9 billion or more.
Yahoo management has given every indication that it will return some of that money to shareholders, probably by acquiring Yahoo shares, raising the price of those remaining on the market.
So now you know the truth: The reason Yahoo is valuable to its investors has nothing to do with it being a consumer Internet company or its display advertising business.
It's a tracking stock for Alibaba.
This puts Marissa Mayer in a wonderful position.
The only way Yahoo can return to growth is to invest lots of money in building or buying new, disruptive products and businesses.
For years, Yahoo management refused to do that. First, it had the chance to acquire Google when it was a fast-growing, but overpriced startup. It passed. Later, it could have bought Facebook at a huge premium. It passed.
The reason Yahoo passed on both those acquisitions — and failed to invent its own, equally disruptive products — was that it had a successful display advertising business to protect.
Yahoo CEOs before Mayer knew that someday they were going to have get the company into a new line of business, but they were unwilling to sacrifice the company's current quarter to do it.
Well, now shareholders don't care if Yahoo has a lousy quarter, because they're not investing in Yahoo for Yahoo's business anyway. They're in it for Yahoo's stake in Alibaba.
That means Mayer has time to implode Yahoo's core business and spend a lot of money growing something else in its place.