With two trains of thought on whether Yahoo (YHOO) should be held long term, I decided to explore the reasons behind these camps and draw a conclusion myself. Would Yahoo be a good long-term hold or should an investor sell the stock?
Yahoo Display Revenue
We had a triple decline in this area the second quarter of 2013:
- Display revenues declined 12% year-over-year to $472 million
- Ads sold for display declined by 2%
- Price of ads declined by 12%
Yahoo Search Engine Revenue
Yahoo's revenue from search engines sold $418 million in the second quarter of 2013, but that is a 9% decrease over the previous year. Here's the irony behind this: the company is selling more ads because paid clicks increased by 21% year-over-year. The problem is the price per click came down by 8%.
Yahoo's bottom line continues to increase because of two particular holdings: Yahoo Japan and Alibaba. Since 2010, the percentage of net income that these two holdings have brought Yahoo has more than doubled. It looks like the company will become more dependent on these two assets as time progresses.
Internet users have increased from 550 million in 2008 up to 675 million by 2012. Continuing the same trend by 2020, users should increase to 780 million people. While users have increased, user engagement has struggled to keep up and has even shown a decrease. Even though the decrease is gradual, it has been attributed to the rise in social media by companies like Facebook (FB).
Market share is also expected to decline, and this declination has been attributed to Google's (GOOG) dominance. The company held an 11% market share back in 2008 and as the slide continues, it would be a misnomer to blame everything on Google. Microsoft's (MSFT) Bing continues to gain market share and is forecasted to catch up to Yahoo by 2020 according to projections. In year over year searches, Bing saw a 29% increase while Google saw a 14% increase and Yahoo only rose by a distant 1%.
Yahoo's core business (search and display advertising) makes up 23.3% of the stock's total value according to Trefis.
Analysts remain mixed on whether investors should own the stock long term. "Core business" appears to be challenged, and some analysts cannot recommend owning the stock long term while others believe that Chief Executive Marissa Mayer has done a good job building employee morale and restoring investor confidence as the stock has risen more than 40%.
I understand the challenge Yahoo is facing, but I don't know if I would give up the stock just yet based upon the potential that Yahoo Japan and Alibaba bring to the company. Each represents 18.9% and 39.9% value of the stock, respectively.
It is a very strong and dominant player in China's e-commerce industry. The company connects buyers and sellers in the online market and its "e-commerce and cloud computing" give it an "Amazon of China" look. Connecting buyers and sellers, it is not in the business of selling the goods itself. Check out these statistics for the company:
- Transaction volume 2012 was $180 billion.
- The company is growing at almost 70%.
- First quarter of 2013 recorded a net income margin of 48%.
- The statistics surpass both eBay (EBAY) and Amazon's (AMZN) numbers.
It would be smart for Yahoo to focus on its assets in Asia since the public market value of Alibaba can be worth up to $120 billion.
The value of Alibaba may be worth much more than what is recorded on balance sheets. In the first quarter of 2013 the company saw revenue increases of 71% year-over-year to $1.3 billion and net income increased in outrageous 203% to $669 million.
Public Offering of Alibaba
The next main event that may continue to push Yahoo stock higher is the highly anticipated public offering of Alibaba. With a 24% stake in the company, the explosive growth that Alibaba is having could have a positive effect on Yahoo's stock. In the short term, when Alibaba files, Yahoo shares could see significance increases based on speculation alone.
In the last four years, Yahoo Japan has seen revenues increase by 22.6% and operating income by 29.5%. All this took place while Yahoo has seen a drop in revenue of 21.2% in the last three years and operating income decreased by 26.7%. Yahoo did stay flat on income between 2011 and 2012 but I am not sure it can attributed to Miss Mayer since she didn't start until halfway through the year in 2012. Even though operating income was much lower than 2011, this was attributed to a "non-reoccurring" expense.
Considering Yahoo Japan is almost 20% of the value of Yahoo's stock, it is a good thing it continues to prosper like it does.
There are mixed reviews whether investors should put money into/hold onto Yahoo stock. One argument states that the core business continues to flounder. Another point of view stresses that Marissa Mayer is doing a great job turning the company around plus Alibaba and Yahoo Japan are doing quite well and carry a good portion of the value of the stock.
As an investor, I'm aware that Yahoo's core business has been systematically shrinking for a number of years. Considering that it makes up less than a quarter of the value of the stock as a whole, this doesn't drive me away from a long-term investment in the company. Even with the core business shrinking, the stock has a grown by almost 40% under the guidance of Mayer. This cannot be denied, so she must be doing something right. If I also take into account the two Yahoo Asia investments that make up almost 60% of the value of the stock and are doing quite well, I believe I would choose to continue to buy and/or hold Yahoo stock long term.
Author's Note: Numerical statistics on Yahoo have been taken from its quarterly and annual investor reports.