How pros think Yahoo should spend its Alibaba cash

Yahoo's chief executive, Marissa Mayer, speaks at the 2014 Cannes Lions in June in Cannes, France.
Didier Baverel | Getty Images

With all of Yahoo's troubles—including declining sales and grim outlook—the company has at least one bright spot on the horizon.

It's expected to cash in big when Chinese Internet giant Alibaba goes public, widely expected to be one of the biggest IPOs of all time.

Read More Alibaba IPO likely happening late September

Yahoo owns a 24 percent stake in Alibaba, and is required to sell about 40 percent—or about 208 million shares—at the time of the IPO, leaving Yahoo with a potential windfall of more than $10 billion.

Why Alibaba should buy Yahoo

While the company has alluded to returning about half of its profits from the offering to shareholders, it's expected the company will also spend a lot of its proceeds on beefing up its struggling core ad businesses. But critics aren't certain money can fix Yahoo's problems.

"Yahoo is actually better off just throwing in the towel," said New York University finance professor Aswath Damodaran, a valuation expert.

"The most sensible thing that they can do is give the money back to stockholders. They have lost the game to others (Google, Netflix, Amazon) and it is time for [CEO] Marissa Mayer to concede and not throw good money after bad," Damodaran said in an email to CNBC.

While Yahoo does face significant challenges even after it gets the Alibaba windfall, all hope is not lost—at least not yet, said Kinshuk Jerath, a Columbia Business School marketing professor.

Read MoreAlibaba IPO is good news for Yahoo's stock

"Yahoo is in trouble, there is no question about that," Jerath said. "A simple analysis of its financials shows it's valued nearly at zero, everything is basically Alibaba."

But the company can make a comeback if it plays to its strengths and pushes in new directions, he said. Specifically, Mayer needs to invest some of its Alibaba fortune in two areas: content and mobile, some experts said.

Yahoo, the next Netflix?

"The reason Yahoo still has an audience is because they have content. You want reasons for people to come to you," said Bryan Stolle, a general partner at the venture capital firm Mohr Davidow Ventures.

Yahoo has been on an editorial hiring spree and spending big money on the rights to specific content. In June, it announced it would host the sixth season of the show "Community" and it also partnered with LiveNation earlier this year to stream live concerts.

The company has even taken a Netflix approach and invested in creating two of its own original comedy series, "Other Space" and "Sin City Saints," which it plans to launch later this year and in 2015.

Read MoreWith Alibaba IPO official, pressure mounts on Yahoo

"Yahoo has all the chops to catch up to Google in terms of engineering and capitalize on their massive audience and monetize it through a smart, programmatic advertising infrastructure. Money would be well spent there to continue their growth," said Will Doherty, senior director of business development for Casale Media. "But the riskier, much more lucrative bet, would be on original content and episodic shows."

But beefing up content means the company also needs to make a bigger investment in its video platform.

"For advertisers you need to be able to tell them you can cover all channels, and video is something that Yahoo might want to push into. They may want to invest in some sort of YouTube-type video platform to give them some control over video ads," Jerath said.

A few companies Yahoo might consider in the space include Vimeo and Metacafe, he said.

"Yahoo no longer has to decide if they are a tech company or a media company. The new age of content distribution requires you to be both," Doherty said. "As many of the traditional media companies are realizing they are no longer competing with each other. Rather, it is Netflix, Amazon and Google they need to be more like."

Mobile is a must

Yahoo was late to the mobile game, and now it's playing catch up in a big way.

Since Mayer took over, the company has been actively investing in its mobile business and will likely continue to do so with their Alibaba fortune.

In July, it purchased Flurry, a mobile ad-tech firm, in a move aimed at boosting its native ad business on mobile. Investing in more native advertising companies may also help Yahoo improve its mobile business, Jerath said. Some of the top companies in this space include Nativo, Polar and Outbrain, he said.

Read MoreThe other upcoming IPO you should pay attention to

While the company's overall ad business has been shrinking over the years, the company has shown some recent growth in its search business.

In the second quarter, Yahoo's search revenue hit $428 million excluding traffic acquisition costs (ex-tac), a 6 percent increase year over year. Yahoo's mobile search revenue grew 100 percent year over year, Mayer said during the company's second quarter conference call.

Display revenue, however, dropped 7 percent to $394 million ex-tac during the period.

Read MoreAlibaba's potential secret US weapon

Yet, while the Flurry acquisition and other investments have boosted Yahoo's mobile business some, it's too early to tell if it will make a significant difference, said Martin Uteras, a senior forecasting analyst at eMarketer.

"They are betting on mobile, and that's the big question mark. Are they monetizing mobile and will they be successful with that?" Uteras asked. "Until they report some concrete data on that money, our outlook is pretty bleak. We think they will underperform the market."

Yahoo declined to comment, citing the quiet period before Alibaba's IPO.

By CNBC's Cadie Thompson

Disclosure: CNBC has a content-sharing partnership with Yahoo's finance site.