Yahoo! Worth Buying on Current Price Multiples, Mayer's Vision
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Marissa Mayer is making the most of her appointment as new CEO of Yahoo! ) by building a dream team of C-level executives. Mayer has the arduous task of turning around Yahoo's declining revenues and waning public interest. As a new CEO, she has successfully kicked off this process by implementing extreme changes in the firm's upper management line-up.
Most recently, she has named Henrique de Castro as her pick to fill the Chief Operations Officer of 'COO' position. Mayer worked with De Castro during her years at Google. Before being picked up by Yahoo, De Castro was vice president of Google's partner business solutions worldwide.
In September, she decided to install Ken Goldman as Yahoo's Chief Financial Officer by late October. Goldman comes to Yahoo! with the experience of three decades of working with technology oriented companies. Most recently, he had been brought in to make serious financial decisions like he did for the security company Fortinet (FTNT). His success with making companies more efficient and profitable has made him an ideal choice for to the Yahoo! CEO and shareholders.
Mayer also replaced the current Chief Marketing Officer with Kathy Savitt, previously an executive at American Eagle Outfitters (AEO).
Marissa Mayer's ability to enlist these executives is a victory unto itself. Before her arrival Yahoo! was not always able to retain key hires. Bloomberg Industries' director of North American research said, "Its recent history has been one of losing top talent. On this score, Marissa Mayer appears to be having a positive impact."
Yahoo! Peer Comparison
Several large competitors organize web content and direct traffic on the web. They trade at wildly different valuations, reflecting different enthusiasm for each stock's future prospects.
AOL (NYSE: AOL) is a Yahoo! competitor since way back in the dial-up modem era. Regardless of age, investors could find value in AOL at $37 per share. AOL's shares are trading at a bargain 3.50 price-to-earnings ratio, less than half the 14.2 average price-to-earnings ratio of the S&P 500 index. The price-to-book multiple of this stock is 1.11, cheaper than the 2.07 S&P 500 average. Investors should consider this number to be a lowball estimate because the price-to-book ratio fails to account for internally-developed intellectual property including patents, brands, and trademarks, all of which could have as much economic value as tangible assets. The firm's 1.61 price-to-sales ratio does not detract from the value of AOL since it is in line with today's prevailing market multiples.
These attractive valuations are still low even after the 145% jump in AOL's share price over the past year. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 19.8% per year.
These valuations are in stark contrast with newcomer Facebook ). This stock trades at roughly $20, a price level is too expensive to justify. Equity in this company is rich on a price-to-sales basis since shares trade at a 9.84 multiple, wildly higher than the 1.32 the S&P 500 average. Facebook shares are trading at an indefensibly high 110.4 price-to-earnings ratio. Analysts have offered annualized five-year earnings growth estimates at 27.2% per year, though there isn't much history to justify future forecasts.
Bear in mind that there is no limit to how much market participants will bid up stock. Worse than Facebook, LinkedIn's ) stock trades at roughly $109, a price whose implied valuations seems impossible to justify. The shareholders of this large cap stock have benefited from a 74% jump in price over the past year, a price jump which exacerbated already ridiculous valuations. Equity in this company is rich on a price-to-sales basis since shares trade at a 16.0 multiple, more than ten times the 1.32 the S&P 500 average. LinkedIn shares are trading at an indefensibly high 912 price-to-earnings ratio. Analysts expect that the firm's earnings growth will accelerate with five-year estimates at 63.3% per year, though there isn't much of a track record to go on for such a new company.
Google ) is a little younger than Yahoo!, and may be thought of as its nemesis. Google's stock currently trades at prices near $755 per share, which is pricey in terms of valuation. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.32 while this stock has a much higher 5.72 ratio. Google shares currently trade at a high 22.37 price-to-earnings ratio, a higher value than the 14.2 average of the S&P 500 index.
Aside from AOL, Yahoo! is easily a better investment at $16 per share than these other stocks. Yahoo! shareholders effectively missed the recent stock market rally and have seen a 1.0% decrease in price over the past year. Yahoo! shares currently trade at a high 18.1 price-to-earnings ratio, a higher value than the 14.2 average of the S&P 500 index. The price-to-book multiple of this stock is 1.54, cheaper than the 2.07 S&P 500 average. Yahoo! is also a sum of parts play with non-core assets like its Yahoo! Japan holdings which can be spun-off or sold to other firms. Investors should consider this value to be especially cheap because it does not include internally-developed intellectual property including patents, brands, and trademarks. These are fairly cheap valuation metrics for a firm which has the potential to turn around its operations.
It looks like Marissa Mayer is whole-heartedly trying to change Yahoo! by making big changes at the top. Since successfully changing the executive team, the market is now eagerly watching what it will do going forward. Since Yahoo's current price multiples are reasonable, this might be a good time for investors to buy into this story. Investors seeking value among Yahoo! peers should also consider AOL, and should avoid Facebook and LinkedIn. Google is somewhat more attractively priced than either Facebook or LinkedIn, but it is not trading at an attractive price multiple.
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, LinkedIn, and Yahoo!. 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.If you have questions about this post or the Fool’s blog network, click here for information.