Yahoo: To Sell or Not to Sell?

I thought it would be fitting milestone for my 100th SA article to feature the company which helps provides the platform to share my thoughts on the stock market, Yahoo (YHOO). The company's once mighty market cap has shriveled nearly 90%, from $140 billion to $16 billion in the last decade, even though its current operations are far larger now. The company which once "could do no wrong" seemingly today "can do no right." This hopefully, is about to change.

My major blunder: I admit it, I jumped on the YHOO train after MSFT made its initial tender offer. I thought I would be able to extract a quick profit out of the deal. Wrong… The deal blew up, and I was left holding the bag with about a 50% loss right out of the gate. Then "white knight" Carl Icahn came galloping in to save the day, prompting YHOO shareholders' hope to quickly reemerge. I then broke a cardinal sin by doubling down and purchasing more shares in an attempt to reduce my breakeven point. I bought into Ichan's pitch that he could still resurrect the deal with MSFT. Yes, I threw good money after bad. I found myself in a hoping and praying mode, probable confirmation that my goose was probably already cooked.

Icahn couldn't work his magic, but somehow ended up on YHOO's Board. Antitrust issues broke up its proposed search combination with Google (GOOG), creating yet another chance for MSFT to come a calling. They were nowhere to be seen. Wall Street got giddy again, when Jerry Yang stepped down as CEO, perceiving Ballmer and Co would come to make things right. They never came. It has just been a series of disappointments, as each subsequent event has raised shareholders' hopes, only to have them dashed again.

The New CEO: The street so far has had a very lukewarm response to the hiring of Carol Bartz. She has a ton of experience (maybe too much, as many of her employees are probably young enough to be her grandchildren). She is talented, tough and focused. We have all heard what a daunting task it will be for her to fix YHOO, but it may not be as bad as it seems, as the media loves to sensationalize. She indicated she was not inclined to sell the company's search business to MSFT, which is a brilliant tactical move. The fact is, you can always get a much higher price when the perception is that you have no intention of selling. She is in a definite posturing mode with MSFT. Bartz did some amazing things at Autodesk and maybe she can replicate that magic at YHOO.

To sell or not to sell: The question is, how long will it take to get YHOO firing on all cylinders again? If Bartz is able to turn the company around in relatively reasonable time period, YHOO shareholders could fetch substantially more than the $20-22 they could capture today if a MSFT deal was consummated. The fact is, the stock could easily appreciate to the $50 vicinity, assuming the company shows adequate operational improvement. I don't know about the rest of you, but I would rather have $20 today than the possibility of $50 in two years, a as bird in the hand is worth two in a bush. I think Icahn is on the same page as me, and he may press Bartz to take immediate action.

Bottom line: The stock's upside potential at this juncture absolutely dwarfs its downside risk. Since it has already been beaten down to oblivion, it really has no direction to go but up. The company has no debt, a nice chunk of cash stashed away for a rainy day, and ownership positions in some very valuable Asian assets. The stock even trades near shareholders' equity (rare for a tech). Its site receives over 250 million visitors a day. Add in the wild cards such as Icahn, MSFT , Bartz, and even GOOG again, and you have the recipe for a good thing to happen.

Disclosure: Long YHOO and MSFT.

Comments

[guliamo:]

I think the plain fact is that Yahoo failed to reinvent themselves.
We are seeing the results of the terrible Zemel era - that dude did so much damage.
yahoo can't compete with Google on anything and in my book are a SELL

Jan 16 04:56 AM

[Roger Knights:]

The decline of banner advertising is going to hurt the company.

Jan 16 05:15 AM

[chrlsboone@...:]

You seem to have said what I belive to be true and I followed a simular path and have doubled again on the stock buying it at $12. We will see.

Jan 16 02:21 PM

[Robert DiAl...:]

I am long Yahoo and hanging on till some buys all or part of it or its businesses... IMHO.....

Jan 17 05:39 PM

[kris23:]

This stock definitely has its potential. Banner adverstising may hurt them a little, but like it was mentioned in the article, between Bartz, GOOG, etc, this has to be a recipe for some kind of good. Investors are becoming more bullish (www.predictwallstreet....) and I think in the long run YHOO would be good to hold on to.

Jan 19 03:44 PM