3 Reasons Yahoo May Invest In Algo And Paid Search

Analysts led by Bob Peck at SunTrust commented on Yahoo! Inc. YHOO Tuesday following its 8-K filing with the SEC.

Peck highlighted three key points from the filing that added to the firm’s “conviction that Yahoo! may choose to invest in and operate both algorithmic and paid search on mobile and desktop going forward.”

1. The Microsoft Corporation MSFT search “deal can be terminated after October 1, 2015.”

2. “Yahoo will only serve Microsoft algorithmic and paid search on 51 percent of results, freeing 49 percent for its own efforts” or that of partners.

3. “Microsoft will hire its own search sales force – while Yahoo maintains its own existing force.”

Peck noted that the above items appeared as “a possible precursor to a split product.”

Related Link: SunTrust's Bob Peck: Investor Concerns Over Google Are 'Valid' But 'Baked In'

The reason the 8-K filing was of interest, in Peck’s view, was related to the fact that “Yahoo! under-earns on a revenue per employee basis.” This issue could be addressed through a headcount reduction of approximately 15 percent and would save around $250 million annually, providing a 23 percent lift to EBITDA.

The impact of employee reductions, however, would be “muted” if Yahoo pursued company-owned search.

“Yahoo!'s core has been weak over the past several years, and while the strength in MaVeNS is a positive, investments in search would likely suppress near term margin potential. That said, a partnership with Google would likely boost near term results,” Peck added.

The analysts concluded that “Yahoo! may actively pursue its own search interests, which may be accretive in the long run, but will likely cost several hundred million dollars."

The firm maintained a Buy rating on the stock with a $61 price target.

Yahoo recently traded at $44.91, up 0.57 percent.