Yahoo Still Faces Many Challenges

by Larry Gellar

Internet information provider Yahoo! (YHOO) has been one of the most tumultuous tech companies in recent months, and yet, Wall Street has reacted favorably to what appears to be a rather insignificant development. With this in mind, I recommend holding back on a Yahoo! purchase, especially considering the higher price that the shares have been trading for.

Indeed, the move I am referring to is news that the company will shed 2,000 jobs. Don’t get me wrong – this is probably the right move for a company that has 14,100 employees but only $4.98 billion of revenue. On the other hand, investors shouldn’t see the headline as a buying opportunity but instead a grave reminder that Yahoo! still has a variety of challenges ahead. While some of Yahoo!’s portals (finance, movies, news, sports) are certainly very strong, people are visiting Yahoo! much less than they used to. That can be attributed to Facebook and strong competition from a number of other web sites, and for the time being, I don’t think these shares are worth more than $15.

Famous hedge fund Third Point isn’t thrilled either. Like me, the fund agrees that the layoffs were necessary, although Third Point makes a good point in its press release. These layoffs are coming prior to CEO Scott Thompson’s announcement of his strategy going forward, and this should be taken as a warning of how misguided the company is. Any management team can reduce costs by reducing headcount – but a good management team has other ideas that will lead to increased revenue. To continue reading, click here.