Yahoo (YHOO) now may have a better risk-reward ratio than just a week ago, when it was trading about $2/share lower. I recently wrote an article reviewing certain valuation measures about this company. I also discussed the improvement in the board and my hope that Marissa Mayer would be a transformational CEO.
That article was written on Feb. 27 when the stock was $21.16, and YHOO is $23 (pre-open) on March 7, when I am writing this. Yet I am actually more bullish now than then.
There are two reasons for this. The main reason stems from a Barron's blog piece:
Cantor Fitzgerald's Youssef Squali... raised his rating on the shares from Hold, and raised his prcie target to $26 from $21... now has a higher valuation on the company's minority interests in the Alibaba Group Holdings and Yahoo Japan concerns...
Squali has a much higher revised estimate for Yahoo!'s Alibaba stake, perhaps as much as $16 billion:
On its 4Q:12 earnings call, Yahoo valued its Alibaba stake at $8.1B, a valuation that's pegged to Alibaba's last capital raise in September 2012 (at ~$40B total). However, recently-disclosed Alibaba financial results in Yahoo!'s 10K (albeit incomplete) showing 74% and 111% growth in FY:12 revenue and operating income, respectively, support a materially higher valuation, in our view. We peg the new valuation at a range of $53-$79B; or ~$66B at the midpoint, implying $15.8B for Yahoo!'s 24% stake, or ~$8.40/share adjusted for taxes, vs. $5.10/ share previously...
Since 12/31/2012, Yahoo! saw its stake in YJ increase to $8.6B from $6.6B, following a ~36% jump in YJ share price YTD. Adjusted for taxes, this stake translates into $5.2B, or $4.50/share, for Yahoo! vs. $3.20/share previously.
His increased estimates of Yahoo's after-tax values from these two assets has increased by $3.30 for Alibaba and $1.30 for YJ. Thus, Mr. Squali has estimated YHOO as being worth about $4.60/share more than he thought it was worth before analyzing the 10-K, which was filed on Feb. 28. His total estimate of Yahoo's equity interests in these two enterprises is $12.90/share.
While Mr. Squali also said that his opinion of Yahoo's underlying business had not changed, a Barclay's analyst who also commented (more conservatively) the day before on the apparent increased values of Alibaba and YJ does like what he is seeing:
Lastly, DiClemente thinks the "core" Yahoo operations are now worth perhaps $7.78 per share, up from a prior estimate for $5.84, given improvements in things such as "cost-per-click," the rate the company gets paid for its search ads, in light of the recent better-than-expected Q4 results. However, he's not counting on further improvement to boost the stock, writing "we need to see improvement in user engagement metrics and fundamentals in
order to get more constructive on the core business."
For somewhat differing reasons, the good news for YHOO shareholders is that both Mr. DiClemente and Mr. Squali raised their ratings from neutral to positive, and for each, the stock has risen less than their valuation models have risen.
Yahoo also has $4-5/share in working capital plus marketable debt securities minus all liabilities. Thus per the Squali valuations of Alibaba and YJ, YHOO may have $18/share of net asset value. With 1.2 B diluted shares outstanding, that values the remainder-- the actual operating company at only $5/share, or $6 B.
The second and related reason for my increased optimism comes from consensus analyst expectations. After Yahoo's non-GAAP Q4 beat of expectations by 4 cents, analysts lowered their estimates for the current quarter and future periods. Per Yahoo! Finance (what else?), consensus estimates have started creeping up. One needs a magnifying glass to see them, but the changes are in the correct direction for the bulls. Who knows? A little beat on revenues and unanticipated cost reductions might lead to a nice beat on earnings for this quarter.
My underlying bullishness on the stock stems from my belief that as a takeover target, the operating company will be worth much more than $6 B. Unless Alibaba and YJ lose a lot of value-- which is eminently possible-- then so long as Yahoo's operations at least meet expectations, there may not be a lot of downside in the shares (general stock market dislocations excepted). And should operations finally really get moving forward, there is the old "unlimited growth ahead" possibility. After all, this stock sold at the bubble peak in 2000 not merely at 100X earnings, but at 100X sales per share. Yahoo does, after all, operate in a growth sector of the global economy. The New Era is here, and its once-leading exemplar is now a value stock.
Investors have quietly been voting along the lines that YHOO has been offering two ways to win. The stock has far outperformed even Google (GOOG) over the past month and over the past year.
There are no guarantees, of course, but YHOO may be in a sweet spot that could carry it nicely higher. The stock shows good relative strength in a bull market, its underlying asset value may be increasing at least as fast as the stock price, and operations might just be improving.
Despite those factors, the average analyst rating remains at a tepid 2.6. So there's lots of room from that metric for analysts to create a bandwagon.
Thus I'm staying long YHOO and may add more.