Following Dan Loeb's Divestment of Yahoo!
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dan Loeb, the famous activist investor, has been quite successful with his investment in Yahoo! (NASDAQ: YHOO). Last week, he sold 40 million shares of Yahoo!, or two-third of his Yahoo! stake, back to the company for a total transaction value of around $1.16 billion. After the divestment, he still owns around 20 million shares in the company. According to his second quarter letter to investors, since inception, its investment’s internal rate of return was more than 50%. Is Yahoo! still a good buy after Dan Loeb’s divestiture? Let’s take a closer look.
Yahoo! is not performing well in the advertisement field
Under the leadership of Marissa Mayer, Yahoo! has gained as much as 40.35% on the market, outperforming the S&P 500’s gain of only around 18.20%. Yahoo! derived most of its revenue from advertising. In the second quarter, display-ad revenue contributed nearly $471.7 million, accounting for around 41.5% of the total revenue, while the search-ad revenue contributed around $418.2 million in sales. Despite the U.S. advertising market growth of 15% last year, Yahoo! advertisement revenue went the opposite way. The display-ad revenue experienced a 12% decline, whereas the search-ad revenue decreased by 9%.
Its much bigger peers, including Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB), have seen their revenue grow significantly. In the first quarter, Google's revenue experienced year-over-year growth of 22% to nearly $13 billion, while Facebook’s advertising revenue enjoyed spectacular growth of 60% to $1.25 billion, representing as much as 85% of its total revenue. Among the three, Facebook seems to be strong in mobile advertising, contributing as much as 30% of the company’s total revenue.
Dan Loeb is still bullish on Yahoo!, but it is quite expensive now
What got Dan Loeb previously excited about Yahoo! was its stake in Alibaba, the fast-growing Chinese internet firm. He mentioned that since he initiated the position, more than $20.2 billion of value has been created, including more than $5.2 billion of cash being returned to shareholders. He saw that the momentum around Yahoo!’s new products, especially for mobile, has risen significantly. Dan Loeb believed that the company would prosper under the leadership of Ms. Mayer.
However, I personally think that Yahoo!’s valuation is quite high right now. It is trading at around $28 per share, with a total market cap of $30.60 billion. The market values Yahoo! at more than 22 times its trailing EBITDA.
Yahoo!’s valuation is closer to Facebook’s valuation, which is often known to be high. At $35.40 per share, Facebook is worth around $85.20 billion on the market. The market values Facebook at 27.3 times its trailing EBITDA.
Interestingly, Google becomes the cheapest stock among the three companies. Google is trading at $882.30 per share, with the total market cap of around $294 billion. The market values Google at less than 14.7 times its trailing EBITDA.
Facebook and Google are still dominating the mobile and tablet market
In the world’s fast growing trend of mobile and tablets, Yahoo! must focus its efforts not only on increasing the advertising revenue, but also growing its business in the mobile and tablet markets. Google is successfully penetrating the mobile market with its leading position in search and the Android operating system. Currently, Google has taken over 75% of the total smartphone market and 56% of the tablet market in the world. Facebook has its edge with the ownership of invaluable personal data on more than 1.1 billion people globally.
Consequently, it is much easier for Facebook to draw users into its mobile applications, increasing Facebook’s advertisement revenue. Facebook reported growth in its monthly active users by 54% to 751 million as of March. Yahoo!, on the other hand, has just around 300 million users, less than half of Facebook’s monthly active users.
My Foolish take
Personally, I think innovation is the key success factor for Yahoo!, but it will be quite challenging to compete with Google and Facebook. At the current trading price, Yahoo! seems to be quite expensive now. Going forward, technology investors should go with Facebook and Google. With their market-leading positions and their “sticky” platforms, they will continue to dominate the mobile and tablet market in the near future.
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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of 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!