After early success, Yahoo's Mayer faces rising bar

Six months into her tenure, Yahoo Inc chief executive Marissa Mayer has arrested the decline of the Internet portal and has won favour on Wall Street with stock buybacks, but a longer-term turnaround remains uncertain.

Her promise on Tuesday of a modest revenue uptick in the coming year paled in comparison with the growth of its Internet peers. And Yahoo shares, which have gained roughly 30 percent since Mayer took the reins in July, fell nearly 3 percent to $19.77 on Tuesday.

"All in all it seems like they're off of life support," said Michael Binger, a senior portfolio manager at Gradient Investments. But "I still see it as kind of a second tier-search company, a good display company. I still struggle to see the new avenues of growth."

Mayer, 37, who was Google Inc's first female engineer, warned investors on Monday that fixing Yahoo was a long-term project. She outlined a plan to overhaul a dozen of Yahoo's top websites, with the goal of enticing users to spend more time on them and consequently boosting ad revenue through a "chain reaction" of growth.

For investors already satisfied with the stock's recent gains, waiting for Mayer's chain reaction may not be worth the time and risk.

"You can get to $20 with just share purchasing and selling Alibaba stake, basic execution and keeping costs low. Now to drive it further, you've got to fix the properties," said BGC Financial analyst Colin Gillis.

"The road gets a little harder," said Gillis.

The fact that Yahoo is competing against such dominant Web companies as Google, the world's No. 1 search engine, and social networking giant Facebook Inc, makes the challenge all the more daunting.

Street Cred

The product-focused strategy draws on Mayer's strengths in designing some of the most popular online services at her former employer, including Gmail and Google's famously sparse search engine homepage.

She is widely admired in Silicon Valley for her Web product savvy, though some analysts and investors have cautioned that she has never before led an entire

company as CEO.

So far, Mayer has earned high marks in her debut as CEO, with analysts and investors pointing to early accomplishments such as recruiting high-profile executives and boosting morale.

"She comes from a culture that has motivated people to be innovators," said Michael Yoshikami, CEO of Destination Wealth Management, which does not own Yahoo shares.

He said Mayer's "street credibility" should buy her more time with Wall Street as she strives to turn Yahoo around.

"When a new CEO comes in, they have one or two quarters before they have to start showing something. I think she's going to have a year-and-a-half, maybe even two years," said Yoshikami.

Roughly 700 million users still visit a Yahoo website every month - putting it in the top ranks globally. But the amount of activity people engage in on many Yahoo sites, such as its email service, is steadily declining and its smartphone offerings are deemed lackluster.

By contrast, Facebook has created one of the most popular smartphone apps.

Mayer has said her top priority is to create a coherent mobile strategy for Yahoo and that she intends for at least half of the company's technical workforce to be working on mobile products.

The company acquired mobile app developers Stamped and OnTheAir during the quarter, but turning development talent into revenue is the challenge she has yet to address.

Mayer's handpicked finance chief, Ken Goldman, told investors on Monday to expect profit margin pressure in the first half of the year as Yahoo invests in product engineering and marketing to "lay the foundation" for revenue growth in the second half of the year.

And he noted that Yahoo was not through returning capital to shareholders, following the company's $1.5 billion in buybacks in the fourth quarter.

That's been good enough for many investors in Mayer's first six months at Yahoo. The next six months may not be so easy.

"Every area they go into someone is already doing it, probably better," said Binger, of Gradient Investments.

(Additional reporting by Ben Berkowitz)

Image: Yahoo Inc chief executive Marissa Mayer.