In the big picture, Yahoo! competes in very large and expanding markets. Just as Messrs. Jobs, Eisner and Gerstner took Apple, Disney and IBM from has-beens to leadership again in their fields, the latest CEO, Marissa Mayer, likely has carte blanche to direct, redirect and prune Yahoo's operations.
With the "new" Yahoo!, I feel as though I'm seeing the intro to a movie with a happy ending that I have seen a few times in 34 years of investing. In the late 1980s, a business magazine ran an article titled something like, Who Will Unlock the Door to Disney's Magic Kingdom?. Disney stock traded under $1 in 1984 (split-adjusted), lower than it was in 1971. Yet it was a famous brand name that was continuing to do a lot of business. Enter Michael Eisner, and the corporate torpor was gone. The stock's up more than 70 times in almost 30 years. Similarly, calls to break up IBM were widespread when Lou Gerstner, a cigarette company executive, came in to lead it in 1993. The stock was then $10, a price it first reached in... 1966. IBM had gone nowhere for 27 years. Look at it now. And then, of course, there's Apple, which was getting near liquidation when SJ returned for his second act there.
The Tumblr acquisition is a shot across the bow of all of Yahoo's competitors. They all could have used this company. Given its private valuation in 2011 of $800 M, the $1.1 B purchase price is eminently fair. There had to be something about Team Mayer and Yahoo that appealed to Tumblr's decision-makers. My guess is that Mayer has a combination of technical expertise and business skills that persuaded Tumblr CEO David Karp that YHOO is a vehicle that can allow him to garner capital gains with whatever YHOO stock package he is granted.
YHOO has a low enterprise value relative to its profits and its takeover value after accounting for its Asian shareholdings and remaining net cash and cash equivalents. Marissa Mayer is doing precisely what I predicted she would do in my Feb. 28 article. She has pruned operations, thus improving profitability, and now she is redirecting operations away from old guys like me to the young set that is going to grow its income and spend increasing amounts of money for years to come.
Yahoo! competes in gigantic, basically unlimited fields. In cyberspace, it's just a mouse click or touchscreen tap away from its competitors. People who really "get" the Net such as David Karp, and ex-Googler Max Levchin (a polymath Yahoo! board member) know that just because Company A has a gigantic enterprise value and Company B has a small one, the situation could be equalized or even reversed in a reasonably modest time period. So when they opt for Yahoo! and YHOO shares, they are sending a message to those who are paying attention: the Internet times may be a-changin', and the last one now may later be first.
When I look at this Yahoo! Finance chart of YHOO, it is easy for me to envision this recent surge as being similar to the surges that began early in the tenures of the uber-CEOs mentioned at the start of the article- and which went on, and on, and on. No guarantees, of course, but lightning just might be striking.
Risks abound for this company, of course, but YHOO still only trades at twice book value; and that's a book value that has been depressed by the accounting convention that book value shrinks when a company buys in its stock above book. And I don't believe that Alibaba has much contribution to that book value.
As Yahoo! becomes a coherent, trimmed-down, more "happening" company, YHOO shares can now challenge their pre-financial crisis high around $40.
As with Disney and Apple, and for some people IBM, when all of them were depressed and mismanaged, so with Yahoo!: people have a favorable image of it. The company brought the Internet into focus for many people, helping millions leave the security of such walled gardens as AOL managed. This reservoir of goodwill is now meshing with a growing sense that the company has a top-notch board and top-tier management team, and that it just might become a long-term growth vehicle again.
With all the asset values inherent in the company, which I updated most recently in Yahoo Stock Can Now Aim Higher Than $30 on May 8, YHOO provides a nice combination of growth potential and reasonable expectation of takeover value if current management just can't get the job done to the satisfaction of the board.
Silicon Valley, where Yahoo! is headquartered, and New York/Wall Street, where Tumblr is located, both like what they see of Yahoo!. I think that this is one situation where the stock chart probably isn't lying, and good things are probably happening behind the scenes. (Note how wonderful the secrecy of the Tumblr negotiations was. Such secrecy is attractive to future deal discussions with other companies.)
Thus my point of view is to accentuate the positive here, and I actually bought more YHOO Monday, having also added to my position late Friday when the Tumblr rumors surfaced. What's been done wrong with Yahoo! is in the past, just as it was in the past with Disney, IBM and Apple when the right CEO took the helm. It takes a while for memories of a company's difficult period to fade, and I look at that phenomenon as a rationale for why YHOO may remain undervalued from a risk-reward standpoint (thus I clearly don't think that YHOO is subject to the efficient market hypothesis).
One of the highest flyers of the Internet bubble just might be blasting off again. If so, how high is up?
Answer: Perhaps very high. And if I'm disappointed and really good things don't happen operationally, I expect Yahoo! to be in play. In a picked-over stock market, YHOO offers an unusual combination of long-term upside potential with downside protection.
Disclosure: I am long YHOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.