Mark Mahaney: 'Yahoo Is Not A Turnaround Story Until The Cash Flow Improves'

Though Yahoo! Inc. YHOO exhibited good growth in mobile revenue, but the decrease in search business was a dampener when the company declared its second-quarter results on Tuesday. EPS for the quarter at $0.16 came below analysts' expectations of $0.18.

Mark Mahaney, RBC Capital Markets lead Internet analyst, was on CNBC recently to weigh in Yahoo's earnings.

'A Lot Of Things That Could Turn Right'

"It [Yahoo] got washed out because you got a 20 percent cut in forward forecasts and the stock only goes off 1 percent?" Mahaney began. "That tells you how de minimis the fundamental expectations are that the Street and the investors have for Yahoo.

"The market wants some clarity on the tax efficiency of the Alibaba spinoff, and they want to see some recovery in Alibaba shares. That's probably the single biggest catalyst."

He went on, "We haven't seen the fundamental turnaround in Yahoo; we have 3 years of declining cash flow out of Yahoo. This is not a turnaround story until that cash flow improves. So, there's a lot of things that could turn right. Everything so far seems to have turned wrong for Yahoo, and its priced in."

Don't Have Free Cash Flow Growth In Yahoo

Mahaney highlighted the concerns regarding Yahoo not able to grow free cash flow saying, "At the end of the day investors want to see growth in free cash flow. This is a growth sector, where is my growth in free cash flow? You don't have it in Yahoo yet, there's no turnaround yet. Maybe next year."

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