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Yahoo management makes the right moves

Yahoo (YHOO) could be a buy now. Many analysts disagree but I think there are reasons to expect better days ahead for the Internet giant.

Remember the "Peanut Butter Manifesto"? Back in November, a staffer at Yahoo wrote a blistering missive criticizing the scattershot strategy in place at that time.

Since then Yahoo has released Panama, their update to their advertising engine.

They've released earnings that disappointed the Street (an 11% drop in profits in Q1) and seen their share price drop accordingly.

They've been at the center of rumors about being in talks to be bought out by Microsoft and seen their share price spike up though most analysts think there is little chance of this actually happening.

Now they are announcing the closing of marginal business segments. The latest victims are their photo-sharing site and auction site.

The photo site is being replaced by Flickr, an astute purchase by Yahoo back in 2005 that has since become ubiquitous on the web.

Yahoo has always sent a great deal of traffic to eBay. Now that Yahoo has become eBay's exclusive provider of graphical ads, as well as sponsored search advertisements, it makes sense to concede the auction space to eBay and look for revenues from the advertising model which Yahoo understands and excels at.

These last two actions are indications that Yahoo management is serious about focusing on core capabilities with the highest revenue potential. This change from being all things to all people will eventually benefit the bottom line.

Little noticed by the financial media is an effort to make Yahoo "open source". They are making an effort to enlist the huge population of web software developers to create compelling content based on Yahoo data services and code libraries and offer it (most likely for free) to any and all users. This is not completely altruistic. It will have the effect of putting Yahoo at the center of a variety of applications. If any of them go viral, Yahoo will certainly benefit.

With the stock around $30, Yahoo is probably a couple of points higher than it deserves to be based on the fundamentals. But with a new focused strategy in place, I would advise buying on weakness.
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