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Yahoo struggles to find its place online

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Azakhel, Pakistan: A Pakistani child displaced by flooding sleeps in a makeshift tent at a roadside camp near Nowshera, Aug. 15, 2010. Photographer Sajjad recalls "I have taken a lot of pictures of children, including those wounded by bombs, but I have never seen a boy in such bad shape. You can imagine one, two, three or even five flies sitting on someone's face, but so many flies on a small face, that was my first ever experience."

Mohammad Sajjad—AP

Do you Yahoo? In the late '90s, that meant to search for things on the web, pre-Googling.

Today it's not clear what "Yahoo" means or what the company is about. In the year since Marissa Mayer became the company's fifth CEO in nearly five years, Yahoo has bought up 19 mobile-app and social media companies.

Was this to transform from a dial-up era portal to a mobile hub? Was it a talent grab? Or was it to boost Yahoo's cool quotient? For the moment, Wall Street doesn't really care, as the stock is up. Eventually, investors will demand real results -- and a clear plan.

In search of sales

Yahoo's core business -- digital advertising -- continues to shrink. In July the company reported that overall revenue in the second quarter had declined from a year earlier. The reason? Display and search-related advertising -- which represent around three-quarters of Yahoo's business -- fell by 12% and 9%, respectively.

Shrinking sales are hardly a new development, and Mayer, a former Google exec, hasn't been able to reverse a trend that has befuddled the firm since 2008 (company officials declined to comment).

Meanwhile, Yahoo continues to lose share in the search engine market, an older part of the business that's still responsible for nearly 40% of Yahoo's sales. It controls a mere 11% of search, down from 24% in June 2007, according to comScore.

In search of talent

The company used acquisitions to poach engineers. But at what cost? In May, Mayer announced the purchase of Tumblr, the microblogging platform with an average of 51 million unique users a month. It was the largest of 19 acquisitions she's made so far.

These startups are unlikely to add much revenue growth in the near term, and Yahoo has acknowledged that many of these acquisitions were made to snap up top-flight engineers, who had turned their backs on the firm.

Kevin Stadtler, head of Stadtler Capital Management, which owns the stock, says the emphasis on talent is changing how the firm is perceived. "It's now okay to say you work at Yahoo at a cocktail party," he says.

There's a limit, though, to this strategy, as Yahoo has only a tenth the cash war chest of rival Google .

In search of value

The stock now trades at a premium to shares of faster-growing peers. Yahoo shares are up more than 71% since Mayer took charge last July. Why? Many analysts point to the company's Asian holdings. Yahoo owns 35% of Yahoo Japan, where revenues are growing fast, and 24% of Chinese e-commerce giant Alibaba, where sales growth is even faster (up recently 71%). This gravy train, though, comes with an expiration date, as Yahoo has agreed to sell a big chunk of its Alibaba stake when the company goes public, expected soon.

Where does that leave Yahoo? In July investor Dan Loeb, who helped bring Mayer aboard, quit as a director and announced that his hedge fund was selling most of its Yahoo stake. Was he declaring victory, or does he know something investors don't? Mayer's second year will be telling.