Time to Buy This Giant on Positive News?

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

Over the last decade a number of companies have dazzled the technology landscape with their innovative offerings. The issue with the technology sector is that innovative doesn’t remain ‘unique’ for long. With a combination of legal and illegal infringement, along with good old fashioned inspiration, everyone tries to replicate. This is the very reason that the technology sector and especially the smartphone industry have tons of legal battles and disputes.

While infringement should be discouraged by any means necessary, it is perfectly alright to get inspired by someone else’s innovation and improve your own offerings. Microsoft and Google (NASDAQ: GOOG) were both highly interested in replicating the ‘social success’ of Facebook (NASDAQ: FB). ‘Windows Live’ has become a distant recollection but the failed Google + is a new entry into the list of failed social attempts. The company launched Google+ in an attempt to leverage on its Search presence and email dominance to kick start a social media platform. The numbers so far have not been good and it seems for now Google will have to settle with ‘search’ as its primary revenue driver.

Where others have failed Yahoo (NASDAQ: YHOO) might succeed due to its different approach. To succeed in its social efforts Microsoft was leveraging on its preexisting MSN messenger and Hotmail user base, Google took a pretty similar approach with focusing on Gmail and Search users. Yahoo is not making the same mistake because the company will incorporate some social features into its existing media platform. The company has partnered with none other than Facebook to launch a social networking experience. According to the CEO, Marissa Mayer, users will be able to login with their Facebook user ID to view content and information shared by friends on the new Yahoo homepage.

This will not be the only changes to the Yahoo Homepage. The company has revamped both its homepage and mail to improve traffic. Yahoo has introduced a new newsfeed with infinite scroll that allows users to experience a virtually endless feed of news articles.  Users will have the option of customizing their newsfeed according to their own personal preferences such as sports, politics, finance etc. The company will also rollout a new-look Internet shop windows which will have a more streamlined mobile application that will cater to both smartphones and tablets.  

Valuations

As the table below shows, the company is an attractive option when compared to similar companies. Yahoo has the highest P/E ratio due to excellent stock appreciation last year and only Google has a lower PEG ratio than Yahoo. Facebook has the highest P/E ratio, but the company has surprised investors with excellent mobile monetization. The company now drives almost 28% of its revenue from mobile and this growth makes it the best placed stock to benefit from sky rocketing growth in handheld advertisement. On the other hand Google has its unique placement due to search domination. While social media can be considered a ‘luxury,’ the offerings of Google are more of a necessity. This fact makes Google a better and safer long term bet, but the primary obstacle to Google remains the growth from mobile. The company has thus far failed to tap its mobile potential, considering it owns the largest handheld operating system in the world.

Company

P/E

PEG

1-Y return

Yahoo

17x

1.49x

41%

Google

14x

1.3x

29%

Microsoft

8.7x

1.7x

-11.35%

Facebook

34x

1.7x

-25%

Bottom-line

The market has positively responded to recent management and vision changes at Yahoo. This is why the stock has given an impressive return of 41% in the last one year. The stock is currently trading at a P/E of 17x and 10% below its mean sell side target price of $22. I am optimistic about the recent changes at Yahoo and believe the company is setting itself up to create long term shareholder value. Despite this positive outlook, I believe the stock is trading pretty close to real value and therefore I recommend investors to ‘Hold’ Yahoo for the time being.


SmartEquity has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook 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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