Yahoo’s Social Media Inadequacy: Is MeetMe the Answer?

Source: Thinkstock

Source: Thinkstock

Did you know that Yahoo (NASDAQ:YHOO) has over 430 million monthly mobile users accessing its products? That is pretty impressive. The company, led by the brash CEO Marissa Mayer, has been trying to turn around after a decade of struggles. Things are slowly starting to come together, but there is one area in which the company, in my opinion, desperately needs growth. That area is social media.

Look, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has its Google Plus, and obviously Facebook (NASDAQ:FB) is a social media giant as is Linkedin (NYSE:LKND). There is, however, one newer, younger, and rapidly growing company that I believe is a takeover target for any of these companies, but I believe it may best fit Yahoo. That company is MeetMe (NASDAQ:MEET). MeetMe started off very slowly, but is rapidly moving up the ranks with its new focus on mobile. It has more mobile users than web users, and generates more revenue from them as well. With Yahoo’s access to 430 million mobile users but no real social media presence (at least, none that are overwhelmingly popular), this is a takeover that makes sense.

Although Yahoo is performing, it desperately needs to diversify out into the social space. But can the company afford to do this? Absolutely. In fact, the company is trying to make all the right moves lately, and this one would a strong decision and good value for the price.

Yahoo has really turned things around, and now that it has cash, it’s looking to acquire undervalued and promising companies. In its last quarter alone, GAAP revenue was $1.133 billion. Revenue excluding traffic acquisition costs was $1.087 billion for the quarter a 1 percent increase compared to the first-quarter of 2013. However, earnings are hurting. Adjusted EBITDA was $306 million, a 21 percent decrease compared to the first-quarter of 2013. GAAP income from operations was $30 million, an 84 percent decreasefrom the first-quarter of 2013. Non-GAAP income from operations was $149 million for the first-quarter of 2014 compared to $224 million in the first quarter of 2013. GAAP net earnings was $312 million, a 20 percent decrease compared to $390 million in the first-quarter of 2013. GAAP net earnings per diluted share was $0.29 compared to $0.35 in the first-quarter of 2013. Non-GAAP net earnings per diluted share was $0.38 for the first quarter of both 2014 and 2013.

Now Yahoo has continued to launch new products and improve existing properties here in 2014, innovating for the daily habits of users around the world. The company launched two digital magazines: Yahoo Food and Yahoo Tech; a new version of Yahoo Sports optimized for iOS 7; Yahoo News Digest for iPhone and iPod touch; Yahoo Smart TV; Aviate Listening Space; Yahoo Games Network and Yahoo Classic Games; and Yahoo Screen integration with Roku. Yahoo also announced a partnership with Yelp to showcase user reviews, business information, and star ratings. This is a touch into the social media space, but I maintain that someone will buy MeetMe and that company should be Yahoo. As a Yahoo shareholder, this makes sense.

But why should Yahoo buy this company and not some other start up? Simple. MeetMe has the growth and it’s cheap. Highly undervalued in my estimation and so Yahoo, or one of its competitors could sweep in before the stock starts really moving. Actually, MeetMe is up almost 30 percent in the last few weeks and rising after strong news driven events. For those unfamiliar, it is a social media company very similar to Facebook in many ways, but more a blend of a friendship and dating site. It’s cheap at only $2.72 a share, so the entire company, even at a huge premium of $20 per share, could be purchased for under $1 billion. But why bother?

Well, Yahoo desperately needs to reach more users, and MeetMe has had massive progress. In Q4 alone, users were up double digits while mobile revenue grew 128 percent relative to the prior year’s comparable quarter. Mobile average revenue per user exceeds $2.00, while web revenue per user is at $1.40 and comprises 39 percent of the company’s revenue. This is exactly what Yahoo needs. But what about its advertising? Yahoo does well here, but MeetMe’s native mobile advertising is up nearly 50 percent quarter-over-quarter as a source of revenue. Further, daily average users are on the rise as are monthly average users, while Yahoo’s social growth is unclear. It has recently revolutionized the in-application chat feature, allowing real time chats and photos to be sent that ‘self-destruct,’ as well as read receipts. This update will keep users returning. Furthermore, it is clearly a hot company as it was recently ranked number 1 fastest growing Internet company in North America on Deloitte’s 2013 Technology Fast 500, a ranking of the 500 fastest growing technology/media companies in North America. But it has also made huge progress in the last month alone, making it attractive.

First, it has enhanced the chat experience in its MeetMe mobile applications by integrating notifications of new friends and new matches directly into user-to-user conversations. The company believes this upgrade will lead to more chat activity by reducing friction involved in starting a conversation when new connections are made on the MeetMe platform. In addition to integrating notifications directly in Chat, MeetMe continues to enhance the core Chat experience.

Its new app update on iOS and Android offers audio alerts of new chats and real-time typing indicators in the chat list; both features are designed to help users more easily keep tabs on their conversations. It also set a new daily record for the number of user-to-user chats sent on Monday of this week. For the first time in MeetMe’s history, more than 15 million chats were sent on a single day. Further, the number of daily active users on mobile overall and on Android specifically is rising exponentially. For the first time in MeetMe’s history, nearly 1,000,000 unique mobile users logged in on a single day. This growth will certainly be reflected in the company’s report next month, and I expect record revenues to be reported. With this kind of growth, it is only a matter of time before the offers come in. Yahoo needs to scoop them up to grow its social presence before the likes of Facebook or Google step in.

In summary, Yahoo currently has cash, cash equivalents, and investments in marketable securities around $4.5 billion. During its first-quarter of 2014 alone, Yahoo repurchased 12 million shares for $450 million and used a net $22 million for acquisitions. The money spent here is easily enough to bid on some social media companies. Others are far too small. Others are for too large. MeetMe seems to be the right balance. We know Yahoo has had its hands full with the Alibaba e-commerce site merger, but I think for the long-term Yahoo needs to focus on its social media presence.

Disclosure: Christopher F. Davis is long Yahoo. He has a buy rating on the stock and a $44 price target.

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