Should You Buy This Digital Media Company?

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The share price of Yahoo! Inc. (NASDAQ: YHOO) has climbed almost 30% during the last two months. With the company laying out a long-term strategy for monetizing its current content offerings and investing in mobile, investors regained confidence in the company. In this article I will analyze why there is still some upside left in the stock.

Revenue Dropping for Yahoo with Improved Earnings

Yahoo’s revenue has been dropping like a rock since the credit crisis in 2008-09. With virtually zero revenue from the growing mobile advertising space, the situation has become even worse. In 2013, mobile ad revenue for Facebook (NASDAQ: FB) is expected to increase from 11% to 25%. At Google (NASDAQ: GOOG), revenue from mobile ads is expected to increase from 17% to 28% year over year. However, Yahoo’s new CEO Marissa Mayer recently acknowledged the company’s drawback in mobile advertising.

With positive earnings surprises for seven consecutive quarters, there’s certainly tremendous opportunity unfolding before Yahoo. Moreover, Yahoo’s divestiture of approximately half its stake in Alibaba has reinstated investor confidence in the new management’s ability to execute its long-term strategy, which remains focused on improving the core business. Yahoo used all the proceeds to repurchase its own shares. With reduced number of shares outstanding, Yahoo’s revenue per share substantially improved, despite falling total revenue. 

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YHOO Revenue TTM data by YCharts

Yahoo! Needs Exploiting the Mobile Ad Space

Yahoo! needs to address mobile monetization in its four most important display advertising categories of News, Sports, Finance, and Entertainment. Recently Brian Nowak of Numura began tracking Yahoo’s performance in each category, and called the performance mixed. 

"On the positive side, Yahoo's pre-install relationship powering the Apple iOS 'Weather' and 'Stocks' apps has made it into a mobile leader in each of those categories. In our view, these are the best near-term opportunities for Yahoo!, as they currently don't have any advertising but they do have audiences," said Nowark. He continues to add, "It is notable that ESPN's engagement edge on mobile is 2.4x larger than it is on desktop. ESPN's category leadership will be difficult for Yahoo! to displace and take share from." 

Yahoo! is also behind in News and Entertainment. The analyst believes leading sites have anywhere from 46X to 1,034X more engagement than Yahoo! does in the mobile ecosystem. 

Investors should keep faith in the new management because they were able to take some right steps like upgrading their email platform to make it more mobile-friendly, and introducing a newly improved Flickr app for devices based on Apple’s iOS operating system.

Yahoo’s ROIC Climbing

Yahoo’s ROIC (return on invested capital) started climbing from below 10% since July, 2012, following the Alibaba divestment. Currently it’s standing just below 30%, well above the ROIC of Google and Facebook. Only Baidu’s (NASDAQ: BIDU) return on invested capital is better, but probably has peaked. With an improving capital position, Yahoo’s revenue is expected to improve as well. 

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YHOO Return on Invested Capital data by YCharts

Relative Valuation of Yahoo!

Yahoo! is attractively valued relative to peers like Google, Facebook and Baidu in terms of its price-to-book multiple of 1.5x. Its PE multiple of 18.2x is slightly higher than the industry average of 17.9. Yahoo’s price-to-sales multiple of 4.6 is just in line with the industry average of 4.2.

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YHOO Price / Book Value data by YCharts

I feel that around $20 a share, Yahoo!'s core display and search business is available at a discount, and if Marissa Mayer is able to follow through on a turnaround plan, then there is even further upside for the stock. I would recommend buying the stock at the current price. 

Anindya7 has no position in any stocks mentioned. The Motley Fool recommends Apple, Baidu, Facebook, and Google. The Motley Fool owns shares of Apple, Baidu, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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