Yahoo investors focus on Alibaba cash, core business

What to watch for in Yahoo's earnings report

Yahoo is set to report earnings after the closing bell on Tuesday, and CEO Marissa Mayer will be in the hot seat yet again.

With the company's core business still struggling, its stake in Alibaba dwindling and investor pressure mounting, there will be plenty for Mayer to talk about during the conference call.

Investors, though, will be particularly focused on what Mayer may say about how she plans to spend the company's proceeds from Alibaba's initial public offering, and what the company is doing to expand its core advertising businesses.

Alibaba cash

Yahoo President and CEO Marissa Mayer
Getty Images

Yahoo made more than $5 billion in cash from the Alibaba IPO, when it was required to sell part of its stake in the Chinese company as part of a deal the two forged in 2012. Now, Yahoo wants to use some of that money to buy one or more large tech start-ups, according to The Wall Street Journal.

Read More Yahoo set to outline cost-cutting efforts: WSJ

But investors may not be too thrilled with the possibility of a big acquisition. Since Alibaba's IPO, Mayer's turnaround strategy has come under increased scrutiny.

EPS surprise history

Period EPS<br> Non-GAAP Estimate Surp (%) Price action<br> day after (%)
Q3 '14 E0.520.3264.8--
Q2 '140.370.38-1.4-5.1
Q1 '140.380.371.76.3
Q4 '130.460.3918.6-8.7
Q3 '130.340.332.3-0.9
Q2 '130.350.3014.810.3
Q1 '130.380.2552.8-0.4
Q4 '120.320.2815.0-3.0

Late last month, the Starboard Value hedge fund called on Mayer to create more value for shareholders by halting acquisitions, cutting costs, monetizing the company's Asian assets in a tax-efficient way and by exploring a possible merger with AOL.

Read MoreHow to play tech earnings this week: 'Fast' pros

According to the Journal's report, Mayer may challenge these proposals on Tuesday by outlining cost-cutting efforts of her own, and sharing more details about how the company decides on acquisitions.

But until Yahoo can show continuing growth in its core business, the pressure from investors will only increase, Macquarie Research analyst Ben Schachter said in a recent note to clients.

Schachter, who has a $40 price target and an "outperform" rating on the stock, said the Alibaba cash and the potential for tax efficiency remain the clear drivers for Yahoo's stock price, which closed near $39 on Monday.

Core business in focus

It's been more than two years since Mayer took the helm at Yahoo, but she has yet to create strong growth in the company's core advertising businesses.

"While 2013 was a year of right-sizing, investments and acquisitions, 2014 was supposed to be the year of monetization and renewed top-line growth, a goal which so far has proven elusive," Cantor Fitzgerald analyst Youssef Squali said in a recent note.

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While Squali has a $43 price target and a "buy" rating on the stock, he said that current valuation of the company assigns no value to Yahoo's core business.

For the third quarter, analysts expect Yahoo to post earnings of 30 cents per share on revenue of $1.05 billion, according to Thomson Reuters forecasts. Year over year, that's an 11 percent decrease on the bottom line and a 3 percent decrease on the topline.

The company's display ad business appears most vulnerable to negative trends, analysts said.

RBC estimates the company will see a 7 percent decrease in display revenue excluding traffic acquisition costs (ex-TAC), as the company continues to struggle in the space against competitors such as Google. Last quarter the company didn't do much better when it reported an 8 percent drop to $436 million.

"Fundamentally, these weak display revenue trends remain probably the most important evidence of the company's overall challenged competitive positioning," RBC Capital's Mark Mahaney said in a note.

Search revenue has also been decelerating this year, shrinking from 9 percent growth in the first quarter to 6 percent growth (ex-TAC) in the second quarter. RBC estimates that in the third quarter the company's search revenue will grow only 4 percent.