One Company Yahoo! Should Acquire

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

Yelp (NYSE: YELP) is down over 30% year to date and is looking attractive. We believe the user review site could be a key acquisition for Yahoo! (NASDAQ: YHOO). Yelp trades at just over a $1 billion market cap, while Yahoo! carried some $7.5 billion of cash on its balance sheet as of last quarter.

In Yelp’s most recent quarterly results the review company narrowed its losses, but is still operating in the red by three cents a share, compared to a loss of $0.24 a share for the same quarter last year. Revenue showed solid trends, up over 60% from last year. Yelp is also expanding into Europe, and recently purchased the European review website Qype for $50 million.

Major investments in Asian companies have helped prop up Yahoo! with IP and patents, but future value will come from a major turnaround or strategic acquisitions. The sale of around half of its Alibaba stake yielded the company $4.3 billion in net proceeds, with the idea that Yahoo! would spend about $3 billion on repurchases or dividends, leaving a good amount of cash for possible acquisitions.

Yelp appears to be a better buy than Google or Facebook for investors, but we believe a Yahoo!-Yelp combo might be an even more profitable proposition. Yahoo! trades at just 5x trailing earnings compared to its historical P/E of 30x, but the low P/E is indicative of the tech company’s growth concerns.

In its latest quarterly results, the new Marissa Mayer-led Yahoo! beat EPS estimates of $0.24 by a whopping $0.11 a share. We still find it difficult to jump onto the bandwagon when the company is expected to grow EPS over the next five years at only 10% annually, while Google (14%) and AOL (20%) are expected to fare so much much better. We believe Yahoo! needs a key acquisition to help take its growth to the next level and attract investor interest. Marissa Mayer's key initiative is to increase the user experience, and Yelp could surely help with that.

Yahoo! has been getting left behind as of late though, as Yelp has announced partnerships with rivals Apple and Microsoft. Yelp's Microsoft partnership includes the use of Yelp reviews to inform and drive certain search results. Yelp also managed to secure a partnership with Apple (NASDAQ: AAPL) for allowing check-ins as one of the features on iOS mobile maps. This comes on top of the integration with Apple’s personal assistant voice service Siri, and should be a big plus as Apple just launched its new iPhone 5.

Initial supply issues with the iPhone 5 in the U.S. are beginning to be ironed out, which should allow even more people to get their hands on the new smartphone. Although the availability numbers of iPhone 5 phones in retail stores—84% for Sprint, 54% for AT&T and 24% for Verizon—might seem weak, it is a vast improvement from previous levels. While Yahoo! has the ability to partner with Microsoft for a few years, with Microsoft's technology now powering Yahoo!'s search results, we'd prefer it if the company looked for more growth opportunities.

Yahoo! should be able to continue to see revenues from advertising, but the question remains: what will drive growth beyond that? Other major search competitors include Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT), which are slowly pushing Yahoo! out of the game. Google and Microsoft (Bing) now own over 80% of the search market, with Google owning 66% and Microsoft 15%.

Some headwinds for a Yahoo!-Yelp combo include the fact that over 80% of Yelp's traffic comes from Google. The other slight hesitation might be that Yelp is seeing an increased number of users using mobile devices, up to 25% of its unique visitors for last quarter, and one of the leaders in the mobile operating game is Google, with its Android operating system. So does that mean Google should buy Yelp? Google failed to acquire Yelp a couple years ago and ultimately settled for Zagat—Google had offered to acquire Yelp for half a billion dollars, but Yelp walked away.

This does not mean that Google could not purchase Yelp now, but we believe that Yelp would be much more meaningful to a company like Yahoo!. With Google’s latest EPS announcement missing on both earnings and revenue, we feel the company has other issues to address, including getting Motorola Mobility fully integrated and profitable.

Third Point remained Yahoo!’s top fund shareholder in 2Q 2012. Third Point took its initial stake in 3Q 2011 and was instrumental in ousting former Yahoo! CEO Scott Thompson. The fund owned 70.5 million Yahoo! shares, or around 6% of the company’s shares. As Thompson was shown the door in May, it appears that many funds were excited about the turnaround prospects of Yahoo!, as ten had 4.8% or more of their 13F portfolios invested in the company. We are also excited about the turnaround opportunity that Yahoo! has, but would really like to have more color on their strategic plans, specifically on how they plan to use the Alibaba capital going forward. Check out all the funds loving Yahoo!.

Microsoft and Yahoo! are on the low end with respect to earnings growth, each with a 5-year CAGR of 10%, while Apple is at 20% and Google is at 14%. Part of what makes Microsoft attractive is its 3.0%+ dividend yield, while Yahoo!'s key factor is its valuation. Trading at only 5x earnings, Yahoo! boasts the lowest PEG ratio (0.4) of all the companies we've discussed here.


This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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