Background: I have written about Yahoo (YHOO) several times on Seeking Alpha. The first one was on Feb. 28, the title of which said it all: Yahoo Stock Is Too Cheap. The stock was then around $21. The last time I wrote about it was on May 22, in Yahoo's Transformation Into A Growth Stock Accelerates. The stock was then at $26.54. Now it is up about another 10% at $29.24 despite certain weak operational metrics for Q2. So the stock has grown, but operations are less clear.
What's next for this former icon of the Mother of All Bubbles?
Younger investors may not realize quite how frenzied YHOO got in the late '90s. At the peak, I recall that it traded near 100 X ales at a time when it was no longer a tiny company. Day traders getting their stock price info from Yahoo Finance were flipping the stock like crazy. When it was added to the S&P 500, there was just no stopping it.
Until the music stopped.
Can the music play again? Can some of the magic return?
Yes, I think that some of the old magic can return. This article discusses the stock more from a top down perspective than a bottom-up, analytic approach, which I used in some of the prior articles.
Updated thinking: Some of my reasons to continue to be bullish are inferential. The stock chart suggests a brighter future. The publicity over CEO Marissa Mayer's overhead view photo shows that there is interest about the company. The attention given to the logo redesign shows the same thing. The report that Yahoo topped Google in one measure of viewer interest in a recent month supports the idea that fundamental progress is underway. When (and if) that progress will turn into increased profits is unknown, though.
The many acquisitions have a purpose and a unity; I'm positive on them, though they have their critics. Whether it's Summly or more recent acquisitions, Yahoo is bulking up on products focused on iPhone and iPad users. This makes a lot of sense. I expect YHOO to benefit materially from a growing focus on products for iDevices.
YHOO cannot easily be valued. There is no way to know what Alibaba.com will produce for Yahoo shareholders. What is Y! Japan ultimately worth to YHOO shareholders? We will only know for sure if and when it is liquidated. Will taxes on the gains on those Asian properties indeed be taxed at 35%, or will CFO Ken Goldman lead a successful effort to minimize taxes? We cannot know yet. Even if it Yahoo tries to employ a shareholder-friendly tax strategy, the U.S. might challenge it, so there may be uncertainty for years.
Is Yahoo a takeover candidate, such as by Apple (AAPL)? Yes, it is. On a sum of the parts basis plus Yahoo's value as a famous brand with a vast user base, it could be viewed as a cheap acquisition at a price north of the $33 or so than Microsoft (MSFT) was willing to pay pre-Great Recession. And that price included minimal values for Alibaba.com and probably not a lot for Y! Japan.
We must remember how long it took Apple to actually begin to start making real money after SJ returned. I think that Ms. Mayer has stated the principles of the turnaround exactly right. User engagement precedes profits.
The YHOO charts look good to me on multiple time frames. First, the 1-year chart (from Yahoo Finance, of course):
And the 5-year view:
Good. A long flattish base, then the buy-every-dip straight up rampage. And then the long-term view for this young company:
Also very good. Total return since the graph begins in May 1996 is about 21% annually. There is a bullish sequence of higher cyclical lows. There is a double top around $40 pre-financial crisis that could be a magnet.
Is YHOO vulnerable to a bear market? Yes. There's lots of profit to take to offset other losses, even if the company executes well. There is real risk if Alibaba goes public in a depressed market. Is the patience of YHOO bulls infinite if operations do not start paying off on the top and bottom lines? No. But turnarounds of complex companies do take time. Notably, Tumblr will certainly take time to pay off both on the top and bottom line. But what of it? Look how long it has taken Google (GOOG) to bring YouTube from a cash drain to a force that would, I expect, bring a large financial return if Google wanted to dispose of it.
In my first YHOO article, I wrote:
I summarized and updated that thought in the May 22 article as follows:
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.
I continue to have the sense that in her own way, Marissa Mayer has a decent shot to be looked back on a number of years from now as the force who led a transformation of this former icon into a business leader in the maturing and increasingly mobile Internet Age.
Risks: Most of YHOO's value is potential rather than baked in the cake. Fate may step in adversely via problems with Alibaba's IPO or some new major bear market in Japan, or of course we bulls may simply be wrong, and $29 may simply be fundamentally too high a price for the shares based on the facts as the future reveals them.
We all know about how tough Yahoo's competition is, and how deflationary the Internet is. YHOO at $29 is inherently riskier than when I first wrote about it in February around $21. Dan Loeb has cashed almost fully out, removing one prop from the bullish argument. So this stock is no sure thing.
Conclusion: Unlike most of the articles and InstaBlogs I've written on this equity, I have chosen a much less analytical tone here, because the stock has moved more into a faith-based price range, in good measure because of increased expected valuations for Alibaba's IPO and because of some disappointments with Yahoo's Q2 results.
Yahoo has one of the world's great brand names: it operates in fast-growth areas, it is financially strong, it has two very valuable Asian equity investments, it is becoming a growing force in iDevice-centric apps, and it is a possible takeover target. I believe there is enough asset value on a sum-of-the-parts basis that fundamental downside risk is not excessive.
While I'm nervous about a 1987-type scenario right now, I'm comfortable with moderate exposure to YHOO. Intermediate-term price target: $40.
Additional disclosure: Not investment advice. I am not an investment adviser.