Highly Undervalued and Ripe to Buy
Rahul 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 seeing a lot of action with the appointment of its new CEO Marissa Meyer. While some are favoring her coming to the office as she will work towards product development and innovation, others are of the view that the media business will likely take a back seat with Marissa focusing more on the product side. The recent report about the Alibaba sales proceeds not going to the stockholders as was previously promised has also resulted in the shares taking a hit. Yahoo! is currently trading at ~$14 per share dropping around 8% since the last month. I say forget all the news. Forget Marissa Meyer and forget the media business. What’s more, let Marissa cut off the media and advertising business tomorrow. Let us find out the intrinsic value of Yahoo! shares if we assume zero values for Yahoo’s search advertising business, display advertising business and subscription business.
Looking at the company reports, we see that Yahoo! currently has around $4.4 billion with its ownership in Yahoo! Japan, $9.9 billion from its ownership in Alibaba and $2.4 billion of cash and cash equivalents putting it at a total worth of $16.5 billion without even including the value of Yahoo’s media and advertising business. With 1,161,989 shares outstanding, the share value by our valuation comes out to be $14.20 which is just the value at which Yahoo! is trading at right now.
Now we ask one question, is Yahoo’s media Business really worth nothing? While the share price may suggest that, we believe that the market is neglecting the high value of the media and advertising business and Yahoo! is selling at a discount. Even if Yahoo! thinks of cutting down its media business in an attempt to go for product with Marissa, Yahoo! will likely sell its business to other media giants such as AOL (NYSE: AOL), hence, generating a lot of money.
As Yahoo! is looking to invest Alibaba proceeds money in the product strategy, there is certainly a risk of bad M&A, but we are positive that Yahoo! could perform a turnaround. We believe this as Yahoo! originally started as a “product” intensive company with its search engine and Yahoo! Mail products. While Google (NASDAQ: GOOG) has officially knocked Yahoo! from being a product giant, Yahoo! might begin a new chapter with Marissa Meyer, who had been an important part of Google’s product strategies, (maps, Gmail, and local services) joining the board.
Though bears would fret about the risks with Alibaba money going into bad acquisitions, I believe that we must give some credit to Yahoo! for being in the business and being a local household name. Though there have not been news of any acquisition, Yahoo! will have many suitors available assuring premium valuation, if it ever comes to that. As Yahoo! turns its business towards its fundamental strengths, I believe that there are sure to be ups and downs, but it would be the finality of it all that will matter. As Yahoo! is trading beneath its intrinsic value, we believe that it is ripe for buy.
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