You Should Bet On Yahoo!

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

Most analysts are currently recommending buying shares of Google (NASDAQ: GOOG). I agree on most points with them: the company has tremendous growth prospects, it has developed strong barriers to entry to its business, and is, undoubtedly, a cash machine. That said, I need to say that I would not buy the stock. I don't think Google is expensive, I just think the management is not thinking of shareholders at the time of making investment decisions. I'd much rather hold Yahoo! (NASDAQ: YHOO), which is governed by smart people who are principally concerned into getting shareholders their money back. Let's take a quick look at fundamentals for both stocks.

As I said before. Google is a growing cash machine, and it doesn't look expensive. It has created a business that is extending beyond its search engine and into tablets and mobile phones through Android. At 2013 x11 P/E (netting off cash), it seems as cheap as Apple (NASDAQ: AAPL), which trades at 2013 x7 P/E when discounting for its huge cash pile.

So Google has a great business, is growing earnings per share at a 19.6% rate (2011 versus what is expected for 2012), and is expected to generate over $58 of operating cash flow in 2013 (versus $47.5 in 2012). What could possibly be wrong? One simple thing: the cash is not going to your pockets and, from what I can guess from Google conference calls, it will not go there for a long time. Remember that founders control the company through a series of special voting shares. They are already incredibly cash rich and they control a company where they can make innumerable investments to fulfill their intellectual curiosities. Great for them--maybe not great for you.

Yahoo! is a different story. To begin with, its fundamentals are not that strong. Trading at 2013 x17 P/E (2014 x15 P/E) and expected to grow earnings per share at a 10 % Year over Year (YoY) rate, Yahoo! doesn't seem as valuable as Google, at least at first glance. That said, Yahoo! has a new board with a clear mandate. Actually, the company has 11 board members who joined this year, except for Sue James, a former accounting executive. The man behind the changes is Daniel Loeb who, through his hedge fund Third Point (one of the best on the Street), controls over 5.8% of voting shares. The big difference between Google and Yahoo! is that Loeb is actually concerned into getting the maximum value for shareholders as fast as possible. Since Third Point came into the game, the turnaround effort became a turnaround fact. The company is unlocking value, as it showed through selling a share of its stake in Alibaba.

Things have not been easy, though; Yahoo! changed its CEO twice until Marissa Mayer got the top job recently. Even if at the last Q3 presentation Mayer did not offer specific details on strategy, the articulation of the overall broader strategy with a particular focus on mobile, personalization, as well as the re-imagining of core search and display offerings, will likely increase investor perception. Meyers's top job is to show that the company has found the right management team to execute the enormous task of reconverting Yahoo! into a long term viable company. The market has already priced the effort and the stock is up by 21% in 2012. Although downside is limited due to its off-balance sheet Asian assets, the company continues to cede share in display advertising as it grows single digits while competitors (such as Google) grow at rates above 20%. There still is a huge work to be done, but it seems management is on the right track.

Google is a better company than Yahoo!. It's impossible to argue against a fact, but it might not be the best investment. Even if it's true that Yahoo! has to find its course for the future, there is plenty of room to grow and management is concerned with unlocking value, which is what you care about as a shareholder. Cash is great, but not if you can't touch it. That is the case in Google, while in Yahoo! the case is exactly the opposite: cash is being looked for to give back to you. I would make a bet on Loeb and the new management team. They know what they are there for: earning you money for your investment.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple 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!

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