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Patience with Mayer's Yahoo turnaround effort starting to wear thin

Wall Street drives down Yahoo's stock as questions surface about the company's progress and CEO Marissa Mayer's tenure enters its third year.

Yahoo CEO Marissa Mayer Ethan Miller/Getty Images

Marissa Mayer begins her third year as Yahoo CEO facing questions that have rarely surfaced since she arrived as the company's latest would-be savior in 2012.

Yahoo investors have prospered during her tenure with the stock more than doubling. The bulk of the gains have to do with the 2005 decision by co-founder Jerry Yang to spend $1 billion to buy a piece of Chinese e-commerce company Alibaba. Yahoo's stock has since ridden on Alibaba's coattails as it prepares to go public later this summer in what could be the largest IPO in history.

Even though Mayer pleased investors with Yahoo's surprise announcement it would retain more Alibaba stock than previously expected, Wall Street remained disappointed with the company's second-quarter results. Shares fell nearly 5 percent to $33.97 in Wednesday afternoon trading.

"Clearly the recovery is taking longer than expected, and the shield of Alibaba is wearing thin," wrote Sameet Sinha, an analyst at the investment bank B. Riley & Co., in a note to investors.

Brian Wieser, an analyst at Pivotal Research Group, who rates Yahoo a "hold," wrote that the results were "much worse than we expected."

The company fell short of Wall Street's sales and earnings estimates. Yahoo added to the disappointment when it set a subpar forecast for the company's current quarter.

So far, the former Google hotshot continues laboring to engineer the promised revival of a sprawling Internet company that is still struggling to adjust to the needs of a very changed technology business.

During the post-earnings conference call with analysts Tuesday afternoon, CFO Ken Goldman allowed that "growth is absolutely a function of success," acknowledging that the company needed "to operate with an even greater sense of urgency."

But he's only a member of the supporting cast. The star of this show is Mayer, and her free pass -- extended only by Yahoo's prolonged relationship with Alibaba -- can only last so long. Over the course of her tenure, Yahoo has bought 41 companies large and small as Mayer sought to change the corporate DNA and rebuild a hipper Yahoo ready to compete in the age of mobility. Mayer stepped into the role -- Wednesday marks two years since she was named CEO -- with a sweeping task ahead of her: to revive a company that had been late to the consumer shift to smartphones and tablets, and breath life into an advertising business that had gone benign.

So far, results have been inconsistent. While the company missed Wall Street expectations this quarter, it narrowly beat estimates in the prior two quarters. Yahoo momentarily raised investors' hopes in May when its display advertising revenue, an important financial metric, reversed a downward trend and actually grew 2 percent. That small gain appears to have been an anomaly as Yahoo's display ad sales fell 7 percent in its most recent quarter. Research firm eMarketer now projects Yahoo will drop from third to fourth place in global advertising market share this year with 2.52 percent, behind Google, Facebook, and Microsoft.

The collective upshot: Closer scrutiny of Mayer's performance in the job.

"The weak display performance, coupled with guidance, puts more pressure on Marissa's tenure," said Laura Martin, a senior Internet analyst at the investment bank Needham and Co. "She's two years in, and the numbers aren't getting better."

While Mayer characterized some of Yahoo's ailments as being "historical" problems, she also owned up to some problems of execution, blaming the quarter's ad slump in part to the delayed launch of the Yahoo Ad Manger Plus, a new ad-buying platform. During the delay, ad sales had slowed on the existing platform as well.

Truth be told, the Yahoo of 2014 bears little resemblance to the turbulent Yahoo of the last decade which was wracked by corporate intrigue and management upheaval -- not to mention a round-robin procession of CEOs.

Mayer is the eighth CEO in the company's history -- a list that includes Yang, former Autodesk CEO Carol Bartz, and former Warner Brothers chairman Terry Semel. There has been dysfunction at the top seat. In 2012, then-CEO Scott Thompson was caught padding his resume with a fake computer science degree. He was replaced by Yahoo's then-media chief Ross Levensohn, and eventually Mayer.

She arrived brimming with plans to revive the company. High on her agenda: a plan to shift the company's focus to mobile. She grew the mobile engineering team from three dozen engineers to more than 500 today, and she overhauled the company's product lineup. In October 2012, she promoted Adam Cahan, who had been with the company since 2011, to head a newly created mobile team. The company has since refreshed most of its mobile properties, including Yahoo Mail, Weather, and Finance and introduced a new product called Yahoo News Digest.

The company declined to break down sales that specifically derived from mobile products, but Goldman described that revenue as "meaningful." That's progress given that Mayer said in January that Yahoo's mobile revenue was "not material."

So far, there's no evidence that Mayer's job is in question and she says the turnaround plan remains on track. It was hardly coincidental that during Tuesday's earnings discussion with analysts, Mayer recalled her first first conference call with investors in October 2012.

"During that call I stated that we believe that Yahoo's best days lie ahead. I also stated that we intend to do great things," Mayer said. "Despite a short-term setback in our pursuit of growth, all those statements have never been more true than they are today."