Zacks Investment Research

Yahoo Inc. (YHOO) has signed a global, non-exclusive contextual advertising deal with Google Inc. (GOOG) to generate impressive revenue growth in future years. Following the news, shares of Yahoo rose more than 1.5% in after-hours trading.

Google ads will now appear on various Yahoo properties and certain co-branded sites using Google's AdSense for Content and AdMob services. Google will retain a part of the revenues generated from the ads displayed on its partner sites. Though the exact ratio wasn't disclosed, website owners who display the kind of ads covered in the agreement would likely get to keep 68% of the revenues.

Contextual advertising is a form of targeted advertising in which the content of an ad is in direct correlation to the content on the web page. Hence, Yahoo will be able to display contextually relevant ads on its web properties, including Yahoo Sports and Yahoo News.

This will help the company to improve its search revenues going forward. Last quarter, the company’s search revenues were up both sequentially as well as from the year-ago quarter due to improvements in the quality of ads.

The alliance will also benefit Google by providing it with additional space to run its ads and increase its advertising revenues. Last year, Google's ad sales on its partner sites totaled $12.5 billion.

The deal comes seven months after Marissa Mayer, formerly one of Google's top executives, took over as the CEO of the company. Analysts have been predicting that Mayer's old ties with Google might eventually improve its relationship with Yahoo and help Mayer to produce more impressive growth in future years.

However, confidence in Yahoo’s prospects remains low, given the growing success of archrival Google and Facebook (FB). Facebook has become extremely popular with users, so much so that it is already the most popular social networking platform.

On the other hand, Yahoo has repeatedly failed to deliver. The company's revenues continued to decline for three consecutive years before registering a small gain last year. Yahoo already has a broad search and advertising partnership with Microsoft (MSFT), which did not turn out as well as it had hoped. The company is steadily losing market share and it remains to be seen whether the current CEO can reverse the trend.

Though the deal could have some positive impact and help Yahoo to generate additional ad dollars, we will take a wait-and-see approach because Yahoo is still struggling despite Mayer’s sincere efforts on all fronts.

Currently, Yahoo, Google, Facebook and Microsoft, all carry a Zacks Rank #3 (Hold).


 
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Zacks Investment Research

Zacks Investment Research

Zacks Investment Research Inc. is an equity research firm. It offers research through quantitative and qualitative analysis. The firm caters to individual and institutional clients. Zacks Investment Research Inc. was founded in 1978 and is based in Chicago, Illinois.
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