Published On: Tue, Feb 3rd, 2015

Wall Street Gives Facebook, Not Yahoo, Benefit of the Doubt

Mark Zuckerberg Marissa Mayer

The recent moves by Facebook CEO Mark Zuckerberg and Yahoo CEO Marissa Mayer indicate the situation of their companies and how the two companies are viewed by the market, a report said.

Both are sitting on piles of cash — Mayer from Yahoo’s $40 billion stake in Chinese e-tailer Alibaba, and Zuckerberg from the $11.2 billion stash generated by Facebook’s accelerating operating cash flow, which reached $5.5 billion last year, CNBC said.

Yahoo is taking a conservative path, essentially giving the Alibaba windfall back to shareholders by spinning the stake off into a separate company, along with an undisclosed Yahoo operating business, the report said.

Meanwhile, Zuckerberg plans to boost Facebook’s operating spending by 50 percent to 65 percent this year, pushing R&D spending as high as $4.4 billion to accelerate development of everything from Facebook’s search engine products to its video advertising business, according to CNBC.

That one Web giant is playing offense, while the other is playing defense reflects the age and culture of their companies, as well as the opportunities they have, said Josh Spencer, manager of T. Rowe Price’s $1.6 billion Global Technology Fund, the report said.

It’s also a result of the sharply lower trust Wall Street has in Yahoo, where Mayer has struggled to turn around the company’s core search and media businesses while making little headway in convincing investors that its $1.1 billion 2013 acquisition of microblogging site Tumblr is successful enough to make much difference, he added.

“With Facebook, the market is more willing to give them the benefit of the doubt, ” that spending now will pay off later, Spencer said, according to CNBC.

That difference in trust is partly about each company’s stock price. Facebook stock has marginally declined in the past three months in line with the tech sector performance, but its shares have tripled since mid-2013. Meanwhile, Yahoo’s recent run, driven by the value of Alibaba stake after the e-tailer’s 2014 IPO, swiftly has turned into a double-digit percentage drop since hitting a mid-November 52-week high, the report said.

Facebook has had a kind of golden touch with its big initiatives lately, especially a reversal of fortunes in its mobile-advertising business. Mobile’s share of Facebook’s total ad revenue has hit 69 percent, triple what it was in 2012, as 2014 company-wide sales neared $12.5 billion, CNBC said.

“Look how far these guys have come, ” Sterne Agee & Co. analyst Arvind Bhatia told CNBC. “Who would have thought in 2012 that they would do $10 billion in revenue from mobile, when they had no mobile strategy.”

Wall Street’s trust in each company may boil down to the progress of two billion-dollar deals, done a year apart, Facebook’s 2012 deal to buy photo-sharing network Instagram, followed by Yahoo’s Tumblr deal, according to the report.

Neither company discloses much detail about how much cash its new unit is bringing in, but analysts believe Instagram is thriving while Tumblr struggles, Spencer said. Instagram has 300 million users and is essential to Facebook’s video push, as well as connecting it to a younger demographic that some had thought was cooling on Facebook until it began its push in mobile and video, said Bhatia, according to CNBC.

“Facebook for Instagram is like EMC buying VMWare or Google buying YouTube — fantastic, ” Spencer said. “Yahoo and Tumblr are more destined for, ‘Well, that money’s gone.'”

Yahoo CEO Marissa Mayer is painting a much different picture of Yahoo’s push into mobile, social and video advertising than analysts do. Yahoo’s mobile revenue is accelerating and now growing faster than the rest of the industry’s, she said on a conference call with analysts last week, the report said.

Its emerging businesses, a mélange of mobile, video, social and native advertising that the 39-year-old CEO refers to by the acronym MaVeNS, generated $1.1 billion in 2014 sales, double the year before, Mayer noted. She also argued that Tumblr had passed Instagram in its total number of users late last year. At the same time, she conceded that Yahoo’s traditional display-advertising business is continuing to shrink, CNBC said.

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