I'm bullish on Yahoo (NASDAQ:YHOO). I have been ever since Marissa Mayer took over.
I'm bullish because she understands what Yahoo is supposed to be, which is not what it was when she took over. She sees it as a technology company, a company that can quickly build, and deploy, high-quality cloud applications for the consumer market. What it was, when she took over, was a media company, with significant Asian assets.
Mayer has spent the last year using her celebrity to boost the stock, and using profits from selling half the Asian position to buy a host of companies, most recently Ghostbird and Rondee. In the process she has made Yahoo into as much of an East Coast company as a West Coast outfit, with four stories in the New York Times Building. She has also built a large staff of cloud-savvy programmers who have, so far, won Apple's (NASDAQ:AAPL) admiration for its new weather app, which adjusts the user's screen based on what it's like outside.
The relationship with Apple is key to Yahoo's future. It's a Fred-and-Ginger story - Apple makes Yahoo look classy and Yahoo makes Apple look sexy. I would expect the company will capitalize on its large East Coast presence at year-end by taking some sponsorship role in the annual ball drop in Times (Yahoo) Square.
But there's just so much cash and celebrity can do for a stock. At some point you need some organic growth. That can easily come from traffic and app downloads - Yahoo's heritage as a media company means it knows exactly how to monetize page views.
The last two quarters under Mayer do not paint a pretty picture. Revenues were down from the same quarter a year earlier, and while income was up marginally, this was mainly due to cost-cutting measures. (The old media company had a lot of fat, which moves like ending telecommuting are helping to trim.) The best news is that margins are picking up, but revenues have to follow.
Analyst expectations are modest. The 22 analysts following the company don't expect any significant acceleration in revenues until 2014, with earnings picking up to only 34 cents/share for the September quarter, in line with the figures achieved last September.
The current PE of 7.62 is entirely artificial, the product of a one-time gain on the sale of half its stake in Alibaba and Yahoo Japan last year. Organic earnings from operations have probably been closer to $1/share, which means the stock presently has a Google-like valuation, without Google-like performance.
My guess is that Yahoo has to beat its June estimates in order to maintain investor interest, and beat the estimates for September substantially. If it falls short the stock should fall precipitously, perhaps back to the $16/share range it held last year, and the rumors of Mayer's imminent departure will begin.
That's not what I expect. I'm expecting an earnings beat of a few cents per share, and a slight beat on revenues. That shouldn't be enough, but combine it with celebrity and expectations, the shares should hold near current levels through the summer.
It's October that will provide the surprise, one way or the other.
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.