Big Reasons to be Bullish on Yahoo!
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Enter Yahoo! (NYSE: YHOO), the heretofore ne’er do well of Internet information providers. It would appear that Yahoo! has parlayed a $1 billion dollar 2005 investment in Alibaba Group Holding into a $7.1 billion windfall by selling just one-half of its 40% stake. This should produce a tangible and positive impact in the way Yahoo! is perceived in the investment community. The sale is strong evidence of a specific achievement and one sorely needed to bolster investor confidence in the wake of some recent negative catalysts. In this article we’ll discuss those negative catalysts, and suggest some positive strategies that Yahoo! might consider as it focuses on the future. In the course of this analysis, we’ll make some comparisons to other companies in the industry.
We’ll begin with an overview of Yahoo!’s key fundamentals. Yahoo! has a market cap of around $19 billion and trades at $15 per share. It has a trailing twelve month price to earnings ratio of 17.58 and a price to earnings growth ratio of 1.31. Yahoo!’s price to book is 1.44 and it has a lackluster return on equity of 8.75%. Quarterly year-over-year revenue and earnings growth are in positive territory, reported at 0.60% and 28.4% respectively. Yahoo! sports a remarkably strong balance sheet with a debt to equity ratio of 0.31 and a current ratio more than tripling the benchmark at 3.25 and this is before the proceeds of the Alibaba sale hits the books!
The competence of Yahoo!’s board of directors has been in question ever since turning down an unsolicited $45 billion dollar offer from Microsoft (NASDAQ: MSFT). This faux pas was followed by other embarrassments, including the shabby termination via telephone of CarolBartz in September, 2011, the résumé scandal which ultimately resulted in Bartz’s replacement, ScottThompson, losing his top spot and the former Yahoo executive pleading guilty to charges of insider trading. None of these events endeared the board to shareholders, especially Daniel Loeb of Third Point LLC, whose firm holds more than 70.5 million shares of Yahoo!. In a recent letter to Yahoo’s board, Loeb made several demands and included suggestions for new board members. Daniel Loeb is now a boardmember and his large stake in Yahoo! provides him with a big stick. I’m sure he will use it to serve his best interests and those of Third Point.
AOL (NYSE: AOL), Google (NASDAQ: GOOG), Zynga (NASDAQ: ZNGA) and InfoSpace (INSP) are a few of Yahoo!’s competitors. According to alexa.com, Yahoo! is number 4 in terms of clicks, with Google being number 1 and AOL ranked at 69th place of the top 500 web sites. Zynga and Infospace didn’t make the top 500. Interestingly, Yahoo has partnered with Microsoft and AOL in a bid to counter the online advertising dominance of both Google and Facebook (NASDAQ: FB) and rumors of a Microsoft continue to abound.
All in all, it has been a fascinating few weeks. So where is Yahoo! going from here. Plans for up to $5 billion in share buybacks are still on the table. Also, there is talk that Yahoo! may be spinning off holdings unrelated to its core business, but perhaps the most intriguing direction Yahoo! will take was inspired by former CEO, Scott Thompson. That initiative would move the company in the direction of e-commerce. It will be interesting to see how that unfolds with Loeb on the board.
AOL with a market cap far short of $3 billion is trading at about $27 per share. Although earnings have slipped for the past 3 years in a row, AOL has seen share prices on the rise as the chart comparing Yahoo! with AOL shows.
Google is the undisputed king of Internet information providers and outshines all comers in every imaginable category__except its performance as compared to the S&P 500, where it actually lags behind AOL and InfoSpace. Google has an ironclad balance sheet, more cash on hand than all the monarchs of the world combined and revenues that seem to know only one direction...up!
Zynga, whose IPO launched mid-December, is trading at around $7 per share some 38% below the initial share price. This begs the question; where will Facebook be in five months? Zynga is a niche provider of online games and has close ties with Facebook. Facebook has received considerable impetus from online games provided by Zynga, such as FarmVille and CityVille.
In conclusion, I believe Yahoo! has secured the proverbial “new lease on life” not so much because of the Alibaba deal (which is great), but rather as a result of the new blood injected into the board of directors and the spirited leadership that I anticipate Daniel Loeb will provide. I can’t help but wonder what Loeb’s goal might be. Is he planning to polish up the company, clean out the closets and make it an attractive target for acquisition or does he plan to employ his skills and influence to turn past failures into future successes? The challenges are daunting, but the future is brighter now than it has been in years. One thing I am fairly certain of is, whichever direction Yahoo! is taking, the result will be a positive one for shareholders. I’m bullish on Yahoo! as a long play. Its fundamentals are sound. Google is too rich for my blood, AOL is too entrenched in the past, Zynga has too narrow a focus and InfoSpace is just too small to be permitted on the ride.
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.