The U.S. online display advertising market saw a revival in 2010, with an estimated growth of 17% over 2009. Continued growth means greater competition amongst players like Yahoo! (YHOO), Facebook, Google (GOOG), Aol (AOL) and New York Times (NYT).
We currently maintain a $17.88 price estimate for Yahoo, in line with market price. Display advertising accounts for roughly 18% of Yahoo's stock value by our estimates.
Bright Outlook for Online Display Advertising Market
According to eMarketer, the online display advertising market could record consistent double-digit growth over the next few years, as illustrated in the chart below. (eMarketer report: U.S. online display market forecast, November 2010)
Facebook Closing the Gap with Yahoo
Facebook, in particular, has seen substantial growth in the online display advertising market. Facebook's share of the U.S. online advertising market nearly doubled from 7.3% in 2009 to 13.6% in 2010, while Yahoo's share declined slightly from 16.5% to 16.2% during the same period. Facebook's momentum means that it could soon topple Yahoo from its position atop the online advertising hill.
What can Yahoo do to overcome this threat? It has started to leverage Facebook's large user base to attract more traffic to its own sites by installing tools such as "Like" and "Share". These tools will enable Facebook users to share Yahoo content with their friends, and create a viral effect through which Yahoo can attract more traffic.
Facebook has a substantial user base of around 600 users million worldwide. Its monthly unique visitor totals have increased exponentially over the past few years from about 120 million in 2008 to 540 million in 2010. We expect this growth to continue in the years ahead, with the number of monthly unique visitors hitting 2 billion by the end of our forecast period.
Comparatively, we anticipate more moderate growth for Yahoo, with unique visitor totals increasing from around 620 million in 2010 to nearly 800 million by the end of our forecast period.
Upside to Yahoo from Facebook Tool Implementation
Acceleration in traffic growth is critical for Yahoo to overcome the threat created by Facebook. Leveraging Facebook's user base would be one such way of achieving that. However, Yahoo also needs other supplementary avenues to drive more traffic to its site. A few months back, Yahoo announced the launch of Local Offers to cater to the needs of users looking for the best deals in their area (see Yahoo Enters the Local Marketing Arena). A separate initiative has led Yahoo to partner with mobile phone vendors like Nokia (NOK) to integrate content on smartphones (see Mobile Initiatives Could Boost Yahoo by 10%).
What effect could these initiatives have on Yahoo's stock value? To demonstrate the sensitivity of Yahoo's stock value to visitor traffic, we see a potential 5% upside to our $17.88 price estimate if Yahoo's monthly unique visitor total reaches 1 billion by the end of our forecast period (vs. our base estimate of roughly 800 million).Like our charts? Embed them in your own posts using the Trefis Wordpress Plugin.