Yahoo Japan Corporation (TYO:4689) was going through a rough patch when PC-based ads were declining as consumers shifted from desktop to mobile. But it’s third-quarter results show that its ad business is back on the growth track. Credit Suisse analyst Keiichi Yoneshima said in a research note to investors that the renewed ad growth is likely to drive up earnings growth expectations in the coming quarters.

Yahoo Japan
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Yahoo Japan’s e-commerce ad revenues rose nearly 60% QoQ

The research firm has increased its 12-month price target on Yahoo Japan from ¥600 to ¥640 with an Outperform rating. During the December 2016 quarter, mobile ad revenues surpassed PC ad revenues. The growth in smartphone ads has finally begun to offset the decline in PC ads. Yoneshima said the 6% growth in paid search ad revenues was a big surprise for the stock market.

The analyst was previously expecting Yahoo Japan’s search ad revenues to keep declining YoY. After the surprise third-quarter results, Credit Suisse has reasons to believe that the search ad revenues would continue to grow, albeit in low single digits. One reason is that the gap in price between PC and mobile queries is shrinking. At the same time, click rates for mobile ads have also begun to show growth. These factors indicate that the Q3 surprise was not temporary. The trend is likely to continue.

Ad growth is not the only reason Credit Suisse is bullish on Yahoo Japan. The research firm says effective monetization of e-commerce ads through precise customer targeting has further accelerated growth. Shopping-related ad revenues jumped from ¥3.1 billion in Q2 to a staggering ¥5.8 billion in the most recent quarter. The nearly 60% growth came despite just 4.1% increase in e-commerce shopping value.

Mobile video ads to fuel growth

In March last year, Yahoo Japan launched video ads on Yahoo! Display Ad Network (YDN), which is also contributing to ad revenue growth. The company is planning to start showing video ads on mobile in the Yahoo Japan app. It also plans to expand the ad distribution space. Keiichi Yoneshima is optimistic that mobile video ads would lead to sustained growth in ad revenues.

The company is expected to announce results for the fiscal fourth quarter and full-year ending March 31, 2017 on April 26th. The fourth quarter results would shed light on whether the surprise Q3 ad growth was a temporary uptick or Yahoo Japan would see sustained growth.

Altaba to own 35% stake in Yahoo Japan

Yahoo Japan’s parent company Yahoo! Inc. (NASDAQ:YHOO) has bundled its stakes in Yahoo Japan and Alibaba under a new company called Altaba. Once Verizon closes the acquisition of Yahoo’s main operations sometime in the second quarter, Altaba will mainly be a financial holding company led by Thomas McInerney. Credit Suisse said if Altaba decides to sell its stake in Yahoo Japan in the near-term, it could affect the latter’s stock performance. Altaba owns 35.6% stake in Yahoo Japan.

After the disclosure that personal information of billions of Yahoo! users were stolen in two different hacking incidents, Verizon wanted a $950 million discount on $4.83 billion it had agreed to pay for Yahoo. Verizon argued that after the hacking incidents, people might stop using their Yahoo email and other digital services. But the two companies eventually agreed to reduce the sale price by $350 million. After the acquisition, Verizon plans to merge Yahoo with its AOL division.

Yahoo Japan shares closed Thursday at ¥522 in Tokyo. Credit Suisse’s price target points to a 22.6% upside.