The Long Case for Yahoo

Whether or not the statement made yesterday by Microsoft (MSFT) CEO Ballmer holds any weight, Yahoo! (YHOO) is looking very attractive at these levels. A few things to consider:

A few more points of interest regarding Yahoo!. It's currently trading at ~6x cash & ST debt securities with a market cap of ~$18b and ~$3b in cash and ST debt securities. Carl Icahn sits on the board now and was a proponent of the initial buyout offer.

While an economic slowdown will bring about some pressure on earning power I'm of the belief that virtual companies see a relatively muted impact versus physical firms. As of June Microsoft Corp offered ~$33 per share to acquire Yahoo!. Even if we discount YHOO back to the price it traded at prior to the offer ($18-20 or so) and then proceed to factor in an economic slowdown, I'm still of the belief that $13 per share is an absolute steal.

Can you lose money initially? Of course, especially in this environment. However, it's doubtful anyone would disagree with the macro assumption that online/virtual businesses or extensions of businesses are the future. Name recognition is essential (think of it like 'location location location' in the physical realm) and Yahoo! is one of the best recognized names on the internet.

Finally we all need to recognize that fundamental comparisons at this juncture in time are essentially worthless with the current market volatility. Cash is king and as such we should be seeking out well-capitalized, lower debt entities who are able to ride out this storm and cover their expenses easily. The survivors will be in an extremely strong position to grow as we bottom out (when we bottom out).

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Disclosure: Author is biased via direct or indirect ownership in the companies mentioned.

Comments

[Michael Comeau:]

I've never found multiples of cash to be useful unless you're talking 2 -3 times cash - plenty of companies with 30% or more of their market caps in cash have been absolutely crushed. You may find Giant Interactive (GA) interesting.

2008 Oct 21 06:14 PM

[BetterOpts:]

Why waste time on this dog. As long as the current BOD and JW are there, this thing is not worth the time to place an order. There are better opportunities elsewhere. This company has the smell of a garbage pile.

2008 Oct 21 06:47 PM

[CGPartners:]

I'm too lazy to look it up, but does that Cash number include its marketable securities in Alibaba (parent), GMarket and Yahoo! Japan? I remember seeing some analysis that there was $10b of value there (probably closer to $5 now with the market crapping the bed). Anybody with any color on this?

2008 Oct 21 06:59 PM

[CGPartners:]

Ok, I looked it up. As of June 30, 2008 they has $3.14b of long-term investments in Alibaba parent, Alibaba subsidiary (that which is traded on SEHK) and Yahoo Japan. Take a 30% discount to that and you've got roughly $2.2b of real value (albeit, the Alibaba parent is untradeable and illiquid). Take the $2.2 and add it to the $3.1b of Cash and Debt investments and you've got $5.3b to back out of the fully diluted market cap of $16.9b and you've got $11.8b Enterprise Value.

Assume 0% growth for 2009 and you've got a company trading at 6.3x 2008 EBITDA and 7.3x a Buffett-esque Owners' Earnings (Net Income + D and A - an average baseline CapEx). Not half bad, especially with an itchy Icahn on board.

2008 Oct 21 07:07 PM