Is Yahoo A Pick After The Earnings Report?

Jul.23.13 | About: Yahoo! Inc. (YHOO)

With over 11,500 employees in 25 countries, Yahoo (NASDAQ:YHOO) is both a haven for techies and trainees. The company keeps people connected across devices around the world. It is however facing problems in terms of shrinking revenues. In its quarter two report last week, the company's revenue fell by 7%. The revenue decline demonstrated Yahoo's failure to sell its online advertising. This exacerbated the apprehension surrounding the Yahoo stock, and shares fell before they picked up. The resurgence suggests that the market has confidence in Yahoo.

A Closer Look At Yahoo

Analysts were expecting earnings of $0.30 a share. However, Yahoo reported earnings of $0.35 per share, a 17% improvement from analysts' expectations. The increased shareholder value left the market with a good impression of Yahoo.

And Marissa Mayer remains a charismatic CEO. The market continues to believe that her star power and acquisition strategy will enable Yahoo to overcome competitors such as Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB).

Also, it has become apparent that rivals are taking an increasing share of Yahoo's display ad business. To stop the trend, Yahoo announced two new advertising formats to enhance its content experience. This translates into hope for investors looking to go long on Yahoo. Apart from this, investors have noticed many fundamentally attractive qualities about the online giant.

Fundamentals

Delving into the fundamentals, the price-to-earnings ratio shows that Yahoo is undervalued in comparison to many of its competitors. Yahoo's PE ratio is 7.7X, compared with 21.6X for the industry average. Investors are valuing the earnings of Google (26.3X) and Facebook (566.5X) higher than Yahoo's. And the same can be said of a competitor such as Move (NASDAQ:MOVE) at 114.2X but not AOL (NYSE:AOL) at 3.1X. Yahoo's forward P/E of 15.5X is below Google (17.23), AOL (20.1X), Move (35.1X), and Facebook (33.4X).

Investors are also looking at the sentiments surrounding Yahoo's cash per share. The company is a bit competitive by this metric, as it recorded a cash per share of 2.40. Yahoo has a total cash of $2.63 billion. This provides obvious satisfaction for Yahoo shareholders. However, many of the competitors' cash per share figures are higher when looking at Google (163.3X), Facebook (3.9X), and AOL (6.0X). In the long run, Yahoo's cash per share will provide good value for investors.

Macroeconomic Environment

It is worth assessing the state of Yahoo's surrounding macroeconomic environment. The future of its industry is bright, as smartphones and tablets continue to redefine it. Specifically, online ad revenues are expected to grow at an annual rate of 51% between 2012 and 2015. Also, mobile and social formats will show an accelerated growth. Both of these factors will help Yahoo, though it must address certain issues in the near future.

As stated earlier, Yahoo suffered a revenue decline in its latest report. Consequently, analysts were doubtful that it has the ability to sell more of its online advertising. To shore up sales, the company launched nearly a dozen new product experiences for its core daily habits.

Despite this, Yahoo's estimated revenue growth has been pegged at 2.60. It is decidedly low compared to Google (13.1X), Facebook (26.3X), and MOVE (12.7X). Considering Yahoo's initiatives to drive revenues, it seems possible that a level of cynicism exists about the Yahoo stock. Even if its revenue growth is not expected to be impressive, Yahoo deserves a higher valuation. In the long run, the stock will be fairly valued.

Conclusion

Prominent fund managers are showing a strong interest in the stock. Some of the bullish managers include Dan Loeb, Alex Sacerdote, Josh Resnick, Morris Mark and Jeffrey Altman. Though Yahoo's revenue has fallen, it has not negatively affected the stock. However, it is up to investors to focus on the fundamental analysis of the company. It shows that Yahoo is operating at a discount. An undervalued Yahoo will improve its price multiples in the next few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.