This Beaten-Down Search Company Doesn’t Look So Bad

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

Nowadays, with the massive market share Google has acquired as leader in the search engine space, it is almost hard to imagine that there were ever any other serious contenders. However, some years ago, it was Yahoo that was the major player in this arena. Yahoo (NASDAQ: YHOO) hasn’t found much love among investors in recent years, not least because of relatively poor earnings. However, upon closer examination, it appears to me that there may yet be value to be found with Yahoo.

Yahoo, with a market cap of 18.5 billion dollars, is known best as a provider of internet search services. Its core activities, centered on Yahoo Properties, are divided into three segments, namely Communications and Communities, Search and Marketplaces, and Media. Of these segments, Yahoo generates most of its revenue from search activities. It is clear that Yahoo has been troubled in the past years, reflected among other things in the fact that the company has had four CEO’s in the last two years. Earnings growth has been pretty flat over the last few years, but looking at valuations, it seems as if the market has priced in a lot of this weakness already.

Yahoo trades at 17.7x TTM earnings, which is a slight discount to Google’s (NASDAQ: GOOG) 21.75x earnings and the 38.1x industry average as calculated by CNBC. Price to book sits at 1.44 which is cheap for the technology sector. Google’s price to book is 3.74. Yahoo has a fairly strong cash position, with almost 2 billion dollars in cash and virtually no debt. The stock has a .87 beta which should appease investors looking to avoid volatility.

Clearly, Yahoo is a bit cheaper than Google, but for good reason. Google has been able to consistently improve earnings over the last few years, while Yahoo has lagged behind in just about everything it has tried to do. Most of Yahoo’s negligible earnings growth in recent years has been due to cost cutting. However, it seems that Yahoo has some room to grow with Alibaba, a Chinese marketplace giant in which it owns a 20% stake after selling half of its stake for roughly 7.1 billion dollars.

Alibaba, for those who are not familiar with the name, is comparable to the Chinese equivalent of Ebay, and brings together manufacturers, consumers, and dealers. Alibaba has a market share of almost 50% in the B2B market, and almost 90% in the C2C market, comparable to that of Ebay. Alibaba’s planned IPO would be a potential cash cow for Yahoo.

This Tuesday, Yahoo CEO Marissa Mayer laid out plans for a broad turnaround strategy, which was received well by analysts and employees alike. After years of uncertainty, Mayer appears to be taking matters back into the company’s own hands with plans to bring back advertisers and to expand their user base. However, it remains to be seen how effective these plans are. The two main risks for Yahoo at the moment are the weak macro picture which may limit companies’ internet advertisement budgets, and the heavy competition from firms such as Google.

All in all, despite a number of troubled years where Yahoo lost market share and posted poor earnings, the company at the moment seems valued quite fairly. The sale of half of its stake in Alibaba has raised some cash which should buy the company a lifeline to continue R&D in order to remain competitive. While the company faces some downside risks and stiff competition, it may be worth considering Yahoo especially for those willing to get onboard with Alibaba’s rapid growth.

DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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