More Upside Likely With This Giant

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

Yahoo (NASDAQ: YHOO) shares traded recently at a price not reached since the financial crisis in late-2008. Fear about Yahoo’s future peaked in mid-2011, as interest in social media companies gained momentum. By 2012, shares remained flat, and began its ascent by July 2012 as Facebook dropped nearly 50% from its IPO price. Helped by the hiring of an ex-Google executive, Marissa Mayer, and the realization in the value of Alibaba holdings, a key question remains.

Is Yahoo’s turnaround permanent?

Yahoo share performance compared to Facebook and Google, 6-Month chart:

 

<img src="/media/images/user_15008/yhoofeb15-2013_large.jpg" />

(Source: Yahoo Finance)

Investors need to look for subtle clues that suggest Yahoo’s rebound is in place, other than from quarterly reports.

The 5 things to consider are discussed below.

1)      Content

Yahoo supplies Apple with a pre-installed weather and stock app, but for sports, engagement is over double for ESPN, compared to Yahoo sports. This is according to a Noruma analyst. Engagement for news and entertainment is even higher for competitors apps compared to that of Yahoo. It is no surprise that Disney (NYSE: DIS) and Time Warner (NYSE: TWX) are at yearly highs, providing higher returns than for shareholders of Yahoo. Still, with Yahoo’s focus firmly in place to improve content, the figures below show that Yahoo has much more upside as it turns itself around.

Yahoo is the smallest of the three companies. Both Disney and Time Warner pay a dividend of 1.4% and 2.1% respectively, and command a P/E that is almost three-fold higher than Yahoo shares:

<table> <tbody> <tr> <td> <p><strong>NAME </strong></p> </td> <td> <p><strong>MKT CAP </strong></p> </td> <td> <p><strong>AVG VOL </strong></p> </td> <td> <p><strong>EPS </strong></p> </td> <td> <p><strong>P/E </strong></p> </td> <td> <p><strong>YIELD </strong></p> </td> <td> <p><strong>PRICE/SALES </strong></p> </td> <td> <p><strong>EBITDA </strong></p> </td> </tr> <tr> <td> <p>Yahoo!</p> </td> <td> <p>24.55B</p> </td> <td> <p>22,205,500</p> </td> <td> <p>3.28</p> </td> <td> <p>6.41</p> </td> <td> <p>-</p> </td> <td> <p>4.96</p> </td> <td> <p>1.46B</p> <div> <p>Top of Form</p> </div> <div> <p>Bottom of Form</p> </div> </td> </tr> <tr> <td> <p>Walt Disney</p> </td> <td> <p>100.40B</p> </td> <td> <p>8,804,780</p> </td> <td> <p>3.1</p> </td> <td> <p>17.94</p> </td> <td> <p>1.4</p> </td> <td> <p>2.31</p> </td> <td> <p>10.90B</p> <div> <p>Top of Form</p> </div> <div> <p>Bottom of Form</p> </div> </td> </tr> <tr> <td> <p>Time Warner</p> </td> <td> <p>49.88B</p> </td> <td> <p>6,181,580</p> </td> <td> <p>3.09</p> </td> <td> <p>17.32</p> </td> <td> <p>2.1</p> </td> <td> <p>1.74</p> </td> <td> <p>7.11B</p> </td> </tr> </tbody> </table>

(Data Source: Yahoo Finance)

Share Performance (6-Month):

<img src="/media/images/user_15008/yhoodisfeb15-2013_large.jpg" />

2)      Analyst and Investor Opinion Mixed

Third Point, a hedge fund run by Dan Loeb, had a 29.5% net long position in stocks, with a position in Yahoo topping the list. He reduced his position slightly recently by 15% in late-January 2013, or by 11 million shares. Third Point still holds 62M shares. Earlier this year, a Berstein analyst downgraded Yahoo shares to a “Hold” rating.

3)      Search Traffic Declined in December

ComScore reported that November and December 2012 search traffic declined. The decline could reverse in 2013. Yahoo is improving its portal design, by adding more “social” features to the main page. Yahoo’s partnership with Bing to provide more relevant search results will improve the user experience. As yahoo fine-tunes its methods for drawing more users to its search engine, the traffic decline could reverse this year.

Personalized content discovery in its search could be a good tool that could gain interest from Facebook or Google. Yahoo is focusing on improving the user interface to try to regain market share in search. Yahoo announced a display ad deal with Google in early-February. Google AdSense ads and adds from AdMob mobile will show up on Yahoo sites.

4)      Alibaba Still Matters

Alibaba’s growth is substantial. Based on its buyback, the company was worth $35B. An IPO of the company in Hong Kong could unlock value for Yahoo. Investors should expect an IPO could push Yahoo shares higher, as they recognize the higher book value for the company.

5)      Finally…Earnings

Yahoo reported growth in its revenue for the first time in four long years. Revenue rose 2% over 2011 to $4.47B. Weakness could be found from ad sales, which declined 10% from last year. Price-per-click also rose 1%. Paid clicks rose by 11%.

Conclusion

An overall rise in markets, along with renewed interest in Facebook shares, helped push shares higher for Yahoo. Yahoo is up nearly 37% in a one-year period, and up nearly 43% over the last 6 months. Its low P/E of around 6, and its high book value could limit the downside should shares fall.

This post-internet bubble is in the midst of a turnaround through fresh new leadership. As yahoo recognizes the potential for mobile user growth, online advertising sales, and online content growth, the company could improve its profits. Yahoo is in the early phases of a turnaround that began last year. As Marissa Mayer said, she is looking at original content to drive the other parts of the business. An Alibaba IPO might push yahoo shares higher, in the short-run, but additional upside in Yahoo’s shares may be limited for now.


Author has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Walt Disney. The Motley Fool owns shares of Facebook, Google, and Walt Disney. 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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