Yahoo Could See 5% Upside From Social Networking

Yahoo (NASDAQ:YHOO), which competes primarily with Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), AOL (NYSE:AOL) and New York Times (NYSE:NYT) in the display advertising market, recently announced its results for the second quarter of 2010. Management highlighted Yahoo’s ongoing push in the social networking arena, an area where it lags behind market leader Facebook.

If this campaign succeeds, we believe Yahoo could boost its unique monthly visitor tally to 800 million visitors by 2016, versus our current forecast of 650 million. This would boost the company’s display ad business, yielding a potential upside of 5% over our estimate of Yahoo’s share value.

Below we describe Yahoo’s recent social networking initiatives and provide additional detail on how they could benefit Yahoo’s business.

Social networking could boost monthly uniques

We expect Yahoo’s monthly unique visitor tally to increase from 560 million in 2009 to around 650 million by the end of the Trefis forecast period. You can drag the trend-line in the chart below to create your own unique visitor estimate for Yahoo and see how it impacts the company’s stock price.

If Yahoo successfully taps the booming social networking market, however, it could attract many more users to its site. By comparison, Facebook built an audience of more than 500 million monthly unique visitors  in the first six years of its existence.

Audience growth would provide additional impetus to Yahoo’s display ad business, which grew by 19% year-on-year in the second quarter of 2010.  There could be an upside of 5% to the $18.64 Trefis forecast of Yahoo’s stock price if monthly unique visitors increase to 800 million instead of the 650 million that we forecast by 2016. 

Below we discuss some of Yahoo’s recent efforts to enhance its appeal as a social networking destination.

1.  Citizen Sports acquisition

Citizen Sports is a social gaming website. Users can play virtual versions of numerous sports, including Fantasy Football, interact with their friends, get score updates and so on. According to Yahoo, Citizen Sports attracts 39 million unique visitors per month in the U.S.

2.  Facebook integration

Yahoo and Facebook recently struck a deal that allows users of the two services to link their accounts. Facebook users can link their accounts with more than 15 Yahoo sites, including Yahoo Mail, News and Messenger, in order to share updates with their friends. It will be interesting to see whether Yahoo can leverage Facebook’s massive audience to attract more unique users to its sites.

3.  Zynga partnership

Another noteworthy recent partnership is with the social gaming site Zynga, which offers popular games like Farmville and Mafia Wars. This partnership will enable users to play Zynga games across Yahoo’s properties, including the Yahoo homepage.

You can see the complete $18.64 Trefis Price estimate for Yahoo’s stock here.