Marissa Mayer is turbocharging Yahoo!
Nick 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) is a major internet portal and service provider offering search results, customizable content, chat rooms, and free e-mail. Yahoo.com is currently the world's No. 4 most visited website, behind Google.com, Facebook.com, and YouTube.com. The share price of Yahoo! has been outperforming the market in the previous 6 months, gaining around 27.45% since June 11, 2012. Under new CEO Marissa Mayer's leadership, Yahoo!'s initiatives to become more mobile have been cheered by investors, including the updated Yahoo! Mail and new acquisitions.
Catching Up with Email Services
Yahoo! is providing more reasons for users to visit its online services and stick around longer. Yahoo! upgraded and expanded its email service in an attempt to regain some of the ground lost to Gmail, which is offered by Google (NASDAQ: GOOG). As quoted from the report from WTOP,
Through October, Gmail had more than 295 million active users to eclipse Microsoft's Hotmail at nearly 284 million users and Yahoo email at 282 million, according to the most recent data from the research firm comScore. At the same time last year, Hotmail led the pack with 335 million users, followed by Yahoo at 303 million and Gmail at more than 245 million.
With the increasing competition from Gmail, Yahoo! Mail's total unique visitors in November declined 16% from the same period in 2011, while the number of Gmail visitors increased 25%. Microsoft (NASDAQ: MSFT) and AOL (NYSE: AOL) email services declined 19% and 17%, respectively.
The new Yahoo! Mail is part of initiatives by Yahoo! to adapt to the mobile market. Vivek Sharma, GM of Yahoo Mail & Messenger, stated "the group of new mobile apps was part of Yahoo's goal of ensuring that its products are available across all major mobile platforms -- a move that he said should help Yahoo's email stay popular with the younger generation of users." This new email service is Marissa Mayer's response to users' requests for fewer distractions when it comes to email, allowing users to login quickly, communicate, and get on with the day. With the revamped email service, Yahoo! can better compete with Google for advertisement revenue and regain its users.
Yahoo! acquired a five-person video chat company as reported by Reuters on Dec. 4., 2012. Yahoo! did not disclose the financial terms of this acquisition of OnTheAir, but said the term would be joining Yahoo's mobile group. OnTheAir is backed by True Ventures and Triple Point Ventures. This acquisition was the second deal made by new Chief Executive Marissa Mayer to enhance Yahoo!'s mobile capabilities. The first deal done by Marissa Mayer was the acquisition of one-year-old mobile recommendations app Stamped in late October 2012.
Yahoo! continued to innovate on mobile and connected devices, launching IntoNow 3.0, an innovative and fun way to connect with friends and get more from the TV experience, as reported in Yahoo!'s Q3 results. The number of TV shows tagged on IntoNow has increased approximately 80% year over year. Yahoo! also introduced new, interactive, and immersive experiences for users across PC, mobile, tablet, and connected TV devices.
New Hope, CEO Marissa Mayer
Marissa Mayer has stressed the needs to become a "site of habit," where users routinely go to check stock prices, sports scores, and news. Mayer also said, "Our top priority is a focused, coherent mobile strategy." To get there, the company needs to pull off a "fundamental and massive platform shift" away from PCs and towards mobile devices such as smartphones and tablets. With the re-focused strategy and recent acquisitions, Mayer had given investors new hope for Yahoo!. Two well-known hedge funds, Tiger Global Management and Greenlight Capital, recently disclosed stakes in Yahoo! that they accumulated during the third quarter. Yahoo!'s share price also recently hit a 52-week high.
Analysts' Calls and Estimates
Yahoo! Inc. is one of the leading providers of web-based services and advertisements. Third quarter earnings beat the Zacks Consensus Estimate. Yahoo's search business faces extremely tough competition from Google and Microsoft's ad platform is not generating enough yet. We are encouraged by the refocusing of the company, the many product upgrades and growth initiatives implemented, which are improving engagement on Yahoo properties. However, Yahoo is not one of our favorite plays in the space, given the uncertainty surrounding the search business, deterioration of display ad revenue share and its limited progress in the fast-growing mobile search segment. Reiterate Neutral.
On Dec. 10, 2012, Piper Jaffray increased Yahoo!'s price target to $21.00 and reported,
"Based on our monthly ad checks, Yahoo!'s display business continues to appear in line with our current thinking for Q4 of 2% y/y growth. Based on our daily ad checks in November, we believe that 75% of Yahoo!'s homepage inventory was sold on a guaranteed basis, compared to 50% last November and 74% in October. Furthermore, we are adjusting our price target on YHOO to $21 utilizing the same 4x FY13 EV/EBITDA multiple on Yahoo!'s core, but updating the other asset values to include the Alibaba asset sale."
On Nov. 27, 2012, analysts at Cowen initiated coverage on Yahoo! with a "neutral" rating.
On Nov. 26, 2012, analysts at Goldman Sachs added Yahoo! to their conviction list and increased their price target from $22 to $24 to reflect the net impact of their latest revised estimates and fluctuations in the value of Yahoo!'s balance sheet assets. Goldman's analysts said, "Yahoo!'s most recent filings indicating its capital allocation actions are driving their revaluation of the company's shares. Yahoo! has repurchased more than 54 million shares this year so far for a total of $858 million. Of that total, $212 million was in the company's fourth quarter, which ends in November." Analysts at Goldman also raised their estimates of expectations for the search engine's core business amid signs of improvements and expectations for cost reduction in the near future. According to Golmand, the main risks for investing in Yahoo! right now are the ability of the search giant to monetize the rest of its balance sheet assets, its ability to transition to mobile search, and its relationship with Microsoft.
In the past 90 days, analysts had decreased the EPS estimate from $0.29 to $0.28 for the current quarter, ending December, 2012. However, analysts had increased the EPS from $0.26 to $0.27 for the next quarter in the past 90 days. The full year EPS estimate for 2012 had also been increased from $1.03 to $1.13 in the past 90 days, as seen in the chart below. The current EPS estimate for 2013 is $1.15, compared to $1.18 90 days ago.
Source: Yahoo! Finance
Fundamental Overview and Technical Analysis
Based on the data gathered from MorningStar, Yahoo!'s key stats will be compared to its competitors in the industry of Internet content and information, including Microsoft, Google, and InterActiveCorp (NASDAQ: IACI). Despite the negative revenue growth of -11.6 (3 year average), Yahoo! managed to achieve EPS growth (3 year average) of 41.4, compared to the industry average of 31.8. Yahoo!'s operating margin of 12.5%, ttm is trailing the industry average of 27.5% ttm; however, Yahoo!'s net margin of 79.9%, ttm is much higher than the average of 19.3% ttm. Yahoo! generates stronger ROE of 28.3, as compared to the average of 13.3, and has a healthy zero debt-to-equity, compared to the industry average of 1.2. Yahoo! is currently undervalued, with a P/E of 6.0, a P/B of 1.5, and a P/S of 4.8, compared to the industry averages of 23.4, 3.4, and 5.1, respectively.
Yahoo! closed at $19.52 with a 0.46% gain on Dec. 11, 2012. Yahoo! also recorded a new 52-week high of $19.63. The volume of 19.05 million is 26.84% less than the 30 day average volume of 26.04 million. Yahoo! has a beta of 0.83. The momentum indicator, RSI (14), is in the over-bought territory at 78.99.
Yahoo! has a lot of upside potential if it can successfully adapt itself into the mobile market and utilize its assets more efficiently under new leadership. Yahoo! is currently under-valued compared to its competitors, and the company is technically bullish in the short-term and in the over-bought territory. A credit put spread will be reviewed for investors who would like to acquire Yahoo! stock at a lower price while gaining some upside potential.
- Short April 20, 2013 Put at the strike price of $17.00 for the credit of $0.39
- Buy April 20, 2013 Put at the strike price of $15.00 for the cost of $0.15
The maximum profit is $0.24, and the maximum risk/margin requirement is $1.76 ($2 loss - $0.24 credit received). If Yahoo! closes above $17.00 on April 20, 2013, a 13.64% return on margin will be gained. If Yahoo! falls below $17.00 upon options expiration, Yahoo! stock will be acquired at the cost of $16.76, which is 14.14% lower than the current price of $19.52. $16.76 is below Yahoo!'s 50-day MA of $17.32, which will be the major support for Yahoo!.
Note: All the prices are quoted from the closing of December 11, 2012 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
NickChiu has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google, Goldman Sachs Group, 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!