Why Shareholders Should Like Yahoo's Amended Search Alliance With Microsoft

Analysts at JMP Securities released a report this week updating their stance on Yahoo! Inc. YHOO following the company’s recent announcement of an amended search alliance with Microsoft Corporation MSFT.

Analysts remain cautious on the Q1 performance of Yahoo but believe that the terms of the new alliance could produce upside for the stock moving forward.

Terms

Analysts point to two aspects of the new agreement that they see as particularly beneficial to Yahoo. First, analysts see increased flexibility for Yahoo under the terms of the new agreement.

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“Yahoo! now has improved monetization flexibility as desktop search monetization is no longer exclusive to Bing; we believe this is the first step to Yahoo! Becoming a principal in search…again,” analysts explain.

In addition, Microsoft’s sales team is now exclusively providing ads for Bing, and analysts believe that Yahoo!’s revenue share percentage could easily increase by 500 bps to 93 percent.

What To Watch

For now, analysts are shifting their focus to Yahoo’s performance numbers. They list five areas that are particularly important for the company:

1. Display revenue- Analysts want to see indications that Yahoo’s recent sales reorganization has had a positive impact on Display pricing and revenue.

2. Favorable ad mix shift- Analysts want to see that growth in Mobile, Video, Native and Social ad products is outpacing declines in Desktop revenue.

3. Search- Analysts will be looking for growth in search revenue, particularly following the new agreement with Microsoft.

4. Alibaba- Analysts are watching for updates on the spin-off of Yahoo’s stake in Alibaba Group Holding Ltd BABA.

5. Margins and buybacks- Analysts want to see improving margins and aggressive share repurchase initiatives.

JMP currently has a Market Perform rating on Yahoo!’s stock.