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This seems like a great time to buy more Yahoo! Inc. (YHOO) stock at $26.30 a share. The EV/EBITDA offers further verification for investors. The EV/EBITDA is the enterprise multiple and it takes into account a company's debt and cash levels in addition to its stock price and relates that value to the firm's cash profitability. The enterprise multiple is seen as the most encompassing and is generally considered the most useful in analyzing the current valuation of a stock.

Earnings Before Interest, Taxes, Depreciation, and Amortization [EBITDA] is often more desirable than P/E because it is considered less docile than earnings and P/B because it is a better measure of cash profitability than book value. However, it is not without its flaws.

Taking out interest, taxes, depreciation and amortization can make even completely unprofitable companies appear to be financially healthy. A look back at the dotcoms offers numerous examples of firms that actually had no future, no hope and certainly no earnings, but became the darlings of the investment world. The use of EBITDA as a measure of fiscal health made these companies look attractive.

It is always best to look at several different multiples. Still, the EV/EBITDA gives a good picture about the value of a stock like YHOO. It must be said that the EV/EBIDTA is great for internet companies since they have low capital expenditure and depreciation and amortization numbers.

Heavily Invested in the Future

Before delving deeper into the EV/EBITDA, lets highlight some of the challenges that Yahoo faces and the strategic investments the internet services company has made in the recent past.

The change at the top was a progressive one. I couldn't disagree more with this CBS article. Marissa Mayer is the total opposite of former Yahoo CEO Carol Bartz. Bartz was concerned about cost-cutting and her time is epitomized as one with a lot of layoffs and much uncertainty. On the other hand, Mayer's Yahoo has been promising for employees with the attempt to gain market share being the main theme. Although, I will credit the capex saving deal with Microsoft Corporation (MSFT) to join forces in web search and advertising to Bartz. But then again Microsoft was already pursuing a $47.5B takeover bid that was spurned by Yahoo co-founder Jerry Yang.

Mayer has taken a fractured company and brought it back to relevance. The function of Web portals is dwindling, because more users are shifting to social-networking sites. There will be more people who will have an internet connection in the future and Mayer is refocusing Yahoo to ensure it gets a bigger piece of the pie. Right now, the world population stands at 7B, but shockingly only 2.4B, or 34% of people actually have access to the internet. It is true that the low internet penetration levels in Asia and Africa have a lot to do with this at 15.6% and 27.5% respectively. But the thing is even in the United States, 22%, or about 68M people still aren't connected to the internet!

There is a lot of room for growth and more people will come online and these will make leading social media sites like Tumblr increase in popularity. As a result, there will be a worldwide shift in ad dollars. In 2012, digital ad spending hit a record high when it went past $100B, but this only accounted for 19.8% of the total ad spend. In time to come, company executives are going to move from "traditional advertising" - TV programming, radio, and print - to the fast growing digital ad market.

Now let's take a look at Yahoo's EV/EBITDA.

EBITDA Calculation

To compute EBITDA, equity analysts start with net earnings. Interest expenses, taxes, depreciation and amortization are then added to that earnings number.

12 months ended

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Net income

3,945

1,049

1,232

598

424

Provision for Income Tax

1,940

242

222

219

263

Earnings before interest and tax (EBIT)1

5,885

1,291

1,454

817

687

Depreciation and amortization

655

648

683

739

790

Earnings before interest, tax, depreciation and amortization (EBITDA)

6,540

1,939

2,137

1,556

1,477

Source: Yahoo's Annual Report

1) 2012 Yahoo has no interest Expense and dividends paid over the last five years

Yahoo! Inc.'s EBITDA declined from 2010 to 2011, but then increased greatly from 2011 to 2012.

Current EV/EBITDA

Yahoo! Inc.

Internet

Selected Financial Data (USD $ in millions)

Enterprise value [EV]

24,641

Earnings before interest, tax, depreciation and amortization (EBITDA)

6,540

Ratio

EV/EBITDA

3.77

23.16

Yahoo has a much lower EV/EBITDA than the internet industry with a 3.77 value. Yahoo is relatively undervalued. Interestingly, YHOO's EV/EBITDA has declined greatly from 2011 to 2012 coinciding with Mayer's appointment as CEO. Additionally, Yahoo has actually had an EV/EBITDA value higher than the technology industry average 4 times in the last 5 years. So Mayer has been doing something right as reflected by the enterprise multiple.

EV/EBITDA Historical Ratios

Dec 31, 2012

Dec 31, 2011

Dec 31, 2010

Dec 31, 2009

Dec 31, 2008

Selected Financial Data (USD $ in millions)

Enterprise value

18,050

17,940

18,920

20,330

13,500

Earnings before interest, tax, depreciation and amortization (EBITDA)

6,540

1,939

2,137

1,556

1,477

EV/EBITDA, Comparison to Technology Industry

Yahoo! Inc.

2.76

9.25

8.85

13.07

9.14

Industry, Technology

8.21

7.15

7.45

8.95

6.86

The EV/EBITDA is useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies. Let's now look at how the Enterprise Value is obtained.

Current EV calculation

Current share price

$ 25.81

No. shares of common stock outstanding

1,115,071,678

Market Cap

28,780

Add: Minority interest

45

Less: Cash and cash equivalents

2,668

Less: Short-term investments

1,516

Enterprise value 1

24,641

(USD $ in millions)

1) Yahoo has no debt

EV is the market value of common equity, preferred equity and debt minus the cash and short-term investments value. Yahoo's EV has been a little volatile over the last five years and there was a big jump from 2008 to 2009.

Conclusion: Yahoo has been putting the Alibaba money to good use

Yahoo's biggest weakness was in social networking and the internet giant needed to get in the game via a joint venture or acquisition. Consequently, the Tumblr purchase is a giant step forward although Yahoo was already trying to instill social elements into its network of Web sites. Yahoo is still a gamble for prospective investors and one that we feel might be worth taking at $26.30 a share. We will know in the next year or two whether the big acquisitions will pay off. Until then, it's a bit up in the air.

When looking at the technical chart for Yahoo, the price action indicates an uptrend over the long term. The share price almost hit the 52-week high on May 15, but has since tapered off. This indicates a chance to buy the stock at a bargain. It is true that the Moving Average Convergence Divergence [MACD] indicator has entered into bearish territory, but it still signals upward momentum.

After considering the relatively low EV/EBITDA value of 3.77, options traders might look to buy calls on YHOO with near to mid-term expirations. This is also be a good time for value investors to dollar cost average on YHOO stock. I think the share price might dive a little in the next couple of weeks before heading back up again.

Note: All material sourced from Morningstar and MSN Money.

Source: Yahoo Actually Has Remarkable Potential