Should You Go Long on Yahoo in 2013?

Meena 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) has an impressive portfolio of web-based search and advertising services. The former continues to face robust pressure from Google and Microsoft, but we believe that Yahoo presents investors with an impressive turnaround play. Billionaire David Einhorn was taking a new stake in Yahoo last quarter (see David Einhorn's newest picks).

Obviously, Yahoo's key play is in the online advertising market, which remains one of the most attractive growth segments of the economy. Helping Yahoo capture more search traffic is its transition into content, having agreements with CNBC, NBC and ABC. It is hoped that video content specifically will give a nice traffic boost to the company. Yahoo has also been hedging its deteriorating display ad revenues by tapping into the mobile segment more heavily.

To help refocus on search, e-mail and social networking, Yahoo has been selling off its non-core assets; this includes Yahoo's sale of HotJobs to in 2010. Yahoo has also been focusing on monetizing its Asian assets, including the recent sale of 43% of its stake in Alibaba for $7.1 billion. This cash is expected to go toward dividend boosts or share buybacks. The return on its Alibaba investment has been impressive, especially when considering it paid $1 billion for the entire stake in 2005. Assuming Alibaba can execute an expected 2015 IPO, Yahoo would be able to further monetize its remaining stake, likely seeing an even greater return on its original investment.

From a valuation standpoint, Yahoo trades well below its major tech peers. At 6x earnings, Yahoo is much cheaper than Google (22x), Microsoft (15x) and Comcast (17x). We are also encouraged by the search company’s long-term expected EPS growth rate, which comes in at an 11% CAGR.

Google (NASDAQ: GOOG), meanwhile, also has a limited 5-year expected earnings growth rate of 13%. The Motorola acquisition has been putting pressure on the company, in part helping it to miss 3Q earnings by 15%. The move should still be long-term positive for Google given it couples the company's highly-popular Android mobile operating system with a hardware segment. Billionaire George Soros' was one of Google's biggest fans after adding the stock to his portfolio last quarter (check out George Soros' new picks).

AOL (NYSE: AOL) offers global web services and provides online advertising solutions. AOL's business spans online content, products and services that the company offers to consumers. AOL also owns and operates various third-party websites and runs one of the largest Internet subscription services in the U.S. The tech company trades at an outrageously low P/E of 3x, but its forward P/E is upwards of 20x.

What about Microsoft and Comcast?

Microsoft (NASDAQ: MSFT) trades at 15x earnings, but only a 8x forward P/E, suggesting investors are overlooking its growth prospects. Microsoft expects to grow sales 9% in FY2013 and 7% in FY2014, on the back of new Windows OS releases. Higher product volume is expected to help boost sales, but we'd remain a bit cautious until we see the extent of its hardware plans over the next two years.

One of Microsoft's big initiatives is its push toward mobile, not to mention launching Office 2013, and entering the tablet market with its Surface tablet, so next quarter will be a big one for the tech giant. Billionaire Steven Cohen of SAC Capital is one of Microsoft's key investors (check out Steven Cohen's top picks).

Last but certainly not least, Comcast (NASDAQ: CMCSA) is a massive media company that expects revenues to be up 9% in 2012 and 2% in 2013. These revenue increases are expected to be driven by higher penetration of its bundled services. Comcast's merger with NBCUniversal is beginning to pay dividends with the latter's higher affiliate and advertising revenues. Comcast's cash position is also robust at over $9 billion thanks to various asset divestitures.

In short, we see Yahoo as an interesting turnaround play and believe the search company will continue to focus on profit maximization by entering high-growth markets, in addition to selling off under-performing assets.

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. Insider Monkey's Editor-in-Chief Meena Krishnamsetty had long positions in Google and Microsoft. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google and Microsoft. 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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