Yahoo: Is Now the Best Time to Buy?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Marissa Mayer moved into the C-office at Yahoo! (NASDAQ: YHOO) headquarters just a little over three months ago. A former Google (NASDAQ: GOOG) exec, Mayer promised to bring focus back to Yahoo!. With a full quarter under her belt now, several major moves, and a good earnings report, Yahoo! looks like it's headed in the right direction--but I think it is still too early to call it a buy.
Yahoo! recently released its third quarter earnings report. The company came in ahead of analysts' estimates, recording a profit of $3.2 billion. Most of that profit came from the sale of half its stake in Alibaba, which netted the company $2.8 billion. In the same period a year ago, Yahoo reported earnings of $293 million. Removing the Alibaba divestment and other income from investments, income from operations went up only about 1% year-over-year.
Net revenue for the company also beat estimates by about $10 million. Reporting $1.09 billion, a 2% increase, this marks the third consecutive year of increased revenue in the third quarter. Revenue for the previous two quarters also marked an increase from the year before. After years of losing revenue, this is a good sign that things are starting to turn around in Sunnyvale as Yahoo! is starting to gain back some of the ground it has lost to Google and Microsoft.
Of course, Yahoo! laid out most of its third quarter plans before Mayer took over. The amount of influence she had on the positive earnings report is difficult to gauge. Next quarter will present a better report card for the new CEO.
The Alibaba divestment is part of Mayer's promise to focus on what is important to its 700 million users. She is intent on providing users with a better search experience and improving Yahoo's mail service. She also wants to give the company's homepage a much needed makeover. Furthermore, Mayer realizes the importance of creating a larger presence in mobile computing, and forecasts that in the near future, nearly half of her programming team will be dedicated to mobile computing.
The cash from the Alibaba sale will go toward meeting those goals. After $2.5 billion in taxes, and another $3 billion dedicated to buying back its own stock, Yahoo plans to make small acquisitions of companies for $100 million or less.
Yahoo! announced the first of such acquisitions last week when it bought Stamped. Stamped is a mobile startup of former Google employees who happened to work under Mayer's guidance only a few years ago. The company makes an app to let people record and share their favorite things with their friends. While Mayer plans to scrap development of the app, she is bringing a talented workforce in to improve Yahoo!'s mobile presence.
Mayer has tasked all of Stamped's nine employees with building a mobile development office in New York. Currently, Yahoo!'s mobile efforts are scattered across 70 different apps for Apple's (NASDAQ: AAPL) iOS and Google's Android. Mayer wants to consolidate and create a more cohesive mobile experience for its users.
Mayer noted in the conference call last week that most people already use their smartphones to check weather, sports, news, and the stock market. These are all things at which Yahoo! excels, but has been unable to capitalize on very well in the mobile market. By consolidating apps, Mayer hopes to improve its mobile advertising revenue from users looking for that type of information.
Yahoo! certainly has its work cut out for itself in the mobile advertising space. Market leaders Google and Facebook (NASDAQ: FB) take up most of the market. However, Facebook recently showed that it is possible to take on Google and be successful, showing outstanding progress in mobile advertising in just six months. Of course, Facebook had the mobile users already. Yahoo! will need to find a way to translate its 700 million users to mobile devices.
Yahoo!'s forward P/E ratio is 14.6. That number is actually slightly higher than Google's forward P/E of 14.5. Analysts expect growth for Yahoo! to move at a pace just over 11% over the next five years. They expect Google to grow slightly faster, at a rate of about 13.5%. When the numbers are this close, I would pick the more established market leader.
The Alibaba divestment inflated the company's free cash flow, but Yahoo! is going to reinvest most of the money through share buybacks and small acquisitions. A buyback will boost share values, but it will do little to establish long-term competitive advantages in Yahoo!'s main focuses - search, email, and mobile. However, it does signal to shareholders that the company is operating with their interests in mind.
I like the direction Mayer is taking this company. Coming from Google, Yahoo!'s biggest competition, she understands where the important battles are, and is intent on focusing on those. Getting rid of its stake in Alibaba is a start to a more focused company, and the acquisition of Stamped is a good start to the company's mobile venture. However, I believe progress will be slow. The plan dictates small acquisitions, and it usually takes longer to ink twenty deals compared to just one or two.
Is now the best time to buy Yahoo!? No; it is too early to tell if Mayer's strategy will be successful. The third quarter earnings report is encouraging, but at valuation levels similar to market leader Google, I do not think it is time to invest.
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StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, Google, and Yahoo!. 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.