Top 5 Reasons To Buy Yahoo!

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

Everyone remembers Yahoo! (NASDAQ: YHOO) from the "old Internet." But while it's steadily increased in value for the past six months, it may not have fully realized the potential of its gains just yet. The former search king is intent on making a comeback and reversing its fortunes with innovative new ideas. Here are, in my opinion, the top five reasons to consider Yahoo as a potential investment. 

1.) The Sum Of All Parts 

Yahoo has roughly 1.17 billion shares outstanding and a market cap of about $26 billion. 

On Feb. 15, Morgan Stanley produced a research note about Yahoo that focused on the value of the company’s significant Asian investments - Alibaba and Yahoo Japan. The note stated an estimate that Alibaba Group - which is widely expected to be preparing for its IPO - will do $2.28 billion in net income in 2013 and $3.55 billion in net income for next year. Analyst estimates suggest the company could go public with a valuation of up to $80 billion. 

If those estimates are correct, Yahoo’s stake in Alibaba would be worth up to $11 billion after taxes, or roughly $10 per Yahoo share. 

Additionally, Yahoo’s 35% stake in Yahoo Japan is worth just under $8.5 billion - equivalent to about $5 per Yahoo Share after taxes. 

Yahoo also has about $6.5 billion in cash stashed away, which equals just under $6 per Yahoo share. 

If you add all of that together, you’re in the ballpark of $21. 

However, analysts suggest that Yahoo’s core business (advertising, search, mail, homepage, finance, etc...) is worth north of $10 billion, implying that Yahoo may be severely undervalued. 

2.) New Management 

Marissa Mayer -- the wunderkind former Googler -- has had a very positive reception as the new CEO of Yahoo! The investors like her, the employees love her, and everyone’s cheering for her. But she isn’t the only one responsible for undoing the damage caused by years of mismanagement and underinvestment. Since becoming CEO, Marissa has attracted fresh talent to fill many of the company’s major positions. Two notable actions were hiring Henrique de Casto - a former colleague of hers from Google - as COO, and appointing Max Levchin - founder of Paypal and Yelp chairman - to the board of directors. 

While the team at Yahoo! definitely has a difficult journey ahead of it, the company looks like it's headed in the right direction, with the right people behind the wheel, for the first time in years. 

3.) Acquisitions & Mobile 

In addition to hiring new people to fill key positions, Yahoo! has been acquiring talent and products by snatching up small startups. Since Mayer took over, the company has acquired Stamped, OnTheAir, and Propeld - three mobile software development companies that will become part of Yahoo’s engineering talent. 

With Yahoo!’s recent focus on mobile -- a segment of the market where they have achieved very little success -- it stands to reason that Yahoo! will continue to make many of these small acquisitions, slowly building their talent pool, product portfolio, and market share. 

Yahoo!’s focus on mobile is a step in a new direction for the company. It represents a risky and innovative approach to doing business in an environment that’s radically different than it was even five years ago. In much of the mobile market, there’s no clear dominating force for many of the services. Yahoo! has always had the size, scale, and resources to move forward and innovate on opportunities like this, but until recently, it lacked the vision. 

I believe Marissa Mayer will spot incredible opportunities in the mobile environment. I also believe she will transform the company into what it needs to be to compete in the modern technological landscape. 

4.) The Turnaround

Optimistic investors of Yahoo! are quick to compare the company to AOL (NYSE: AOL). After naming former Google executive Tim Armstrong as CEO and selling off $1 billion worth of patents to Microsoft, AOL began undertaking its own turnaround journey. The rescue effort finally paid off when -- in its Q4 2012 earnings report -- the company announced year-over-year revenue growth for the first time in 8 years. Investors of AOL have witnessed a stunning 100%+ gain over the last 12 months. Similarly, Yahoo has enlisted Marissa Mayer -- a former Googler -- as CEO and is currently in the process of returning capital from the sale of large investments to shareholders in the form of a share buyback. 

AOL is currently proving to Wall Street that you may just be able to teach an old dog new tricks after all. Will Yahoo! follow in the footsteps of this iconic underdog? 

5.) Hype & Momentum 

Since Marissa Mayer was made CEO on July 16, 2012, Yahoo shares have increased in value by 36%. In that time, the company has released multiple major product updates, returned billions of dollars to shareholders through buybacks, hired new management, purchased numerous startups, and even beat earnings expectations. More share buybacks are expected as the company sells off its significant Asian investments for a hefty profit and the company is also expected to continue buying small mobile software development companies and hiring fresh talent to help guide its turnaround. 

Many analysts feel that while the upside to Yahoo! is unpredictable, the downside feels limited because the company is currently engaged in a stock buyback program and is trading at a below-average price-to-book ratio. 

In Summary 

With good management in place, old investments finally paying off, and optimism high among investors and employees alike, Yahoo is looking better than it has in years. If nothing else, this potential turnaround story is worth watching from the sidelines. 

While I personally believe in Marissa Mayer’s ability to turn things around with the team at Yahoo!, this is by no means an endorsement of Yahoo! stock or advice to buy or sell any stock. My goal is simply to educate, amuse, and enrich. Thanks for reading!  


nbradham is long Yahoo. The Motley Fool has no position in any of the stocks mentioned. 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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