Yahoo could look at purchasing public companies including AOL, which may help deliver sales growth, Gillis said. Mayer may also add to her string of startup acquisitions with Web companies that can generate more visitor traffic, he said.
Sarah Meron, a spokeswoman for Yahoo, declined to comment, as did Caroline Campbell, a spokeswoman for AOL.
Alibaba filed on Tuesday for what could be the largest US IPO on record, with the Hangzhou-based company set to raise as much as $20 billion, according to data compiled by Bloomberg. Analysts have estimated the company's valuation could reach at least $150 billion at the time of the offering.
Yahoo owns 523.6 million shares, or a 23 per cent stake, in Alibaba, the remaining holdings from a $1 billion investment in 2005.
Shareholders of the Sunnyvale, California-based company reaped the rewards of that deal in recent years even as Yahoo's digital-advertising market share plummeted because of the surging popularity of Alibaba's services like the Taobao Marketplace and Tmall.com, which connect retail brands with consumers.
Alibaba's sales jumped 57 per cent in the nine months ended December 31 to $6.51 billion from the same period a year earlier, the company said on Tuesday in its prospectus with the US Securities and Exchange Commission.
Net income increased by more than 300 per cent to $2.85 billion. Yahoo shares have climbed 141 per cent in the past two years, almost quadruple the gains in the Standard & Poor's 500 Index.
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• Alibaba aiming to raise $1b in IPO
Mayer and investors will still benefit from Alibaba's growth, because Yahoo is keeping 60 percent of its shares. Robert Peck, an analyst at SunTrust Robinson Humphrey, said Alibaba is the most valuable piece of Yahoo, accounting for more than half the price of the stock, which he gives a $40 target. Less than $7 of it is tied to Yahoo's main business, he said in an April 16 note to investors.
Yahoo's stake in Alibaba is valued at $26.2 billion, based on a fair value that Alibaba assigned to its shares last month, according to the prospectus. Yahoo's market capitalisation as of Tuesday was $36.7 billion.
Yahoo's net revenue is expected to increase less than 2 per cent this year to $4.5 billion, a sixth consecutive year of little or no growth. Meanwhile, the overall digital-ad market should jump 15 per cent in 2014, according to EMarketer, with Yahoo's share falling to 2.5 per cent from 2.9 per cent.
Mayer has said she's focused on several areas to drive growth, including mobile, video and social. She also sees opportunities in native advertising, which places promotions within content like news stories, rather than placing display ads near the top of the page or alongside the content. Mayer's biggest acquisition to date was last year's $1.1 billion deal for blogging site Tumblr, which can help with native advertising.
Yahoo showed signs of progress in the first quarter as net sales topped some analysts' estimates and revenue expanded for the first time in more than a year. The stock jumped 6.3 per cent on April 16, the day after the results, on optimism that Mayer's efforts to lure advertisers are paying off.
"You're seeing some green shoots of the turnaround, but they're still very much in the middle of it," said Peck, who has a buy rating on the stock.
With the Alibaba IPO, Yahoo will lose some help with earnings. A smaller stake in Alibaba means less of the company's profit will flow to Yahoo. In the first quarter, earnings in equity investments, including Alibaba's and another stake in Yahoo! Japan, contributed $301 million.
When Alibaba goes public, Yahoo's development chief Jacqueline Reses, who had been an Alibaba director since December 2012, will resign from the Chinese company's board.
Watch: China's Alibaba seeks blockbuster IPO
As for using the cash from the IPO, Mayer has to balance the quest for growth with shareholder demands for payouts. Yahoo returned $3.3 billion to stakeholders in 2013 in the form of buybacks. Unlike technology companies including Apple, Microsoft and Cisco Systems, it doesn't pay a dividend.
While returning cash may appease some investors, it does nothing to address the challenges posed by Facebook and Google, which are spending billions of dollars on acquisitions and growing much faster than Yahoo.
Mayer will now be able to notch new deals with the windfall, including seeking out high-profile startups that would bring healthy user traffic. Among the candidates that Yahoo might look at could be online scrapbooking service Pinterest and mobile-messaging app Snapchat, Peck said.
Barry Schnitt, a spokesman for Pinterest, declined to comment, as did Mary Ritti, a spokeswoman for Snapchat.
During a call with analysts in April, Mayer said the company would be careful with its cash.
"We intend to be good stewards of our capital and we have been to date," Mayer said. "When we look at the investments we need to make in the business, you'll see the same type of mix we've been making to date: some strategic acquisitions, some tuck-in acquisitions."
As she approaches her two-year anniversary at Yahoo, investors may start demanding more.
- Bloomberg
