Yahoo (NASDAQ:YHOO) and Intel (NASDAQ:INTC) are in different segments of the technology industry. But judging from their recent earnings reports, they do share one problem: slow revenue growth. Yahoo Inc.'s net revenue declined slightly in Q3 as display ad prices remained under pressure. Intel Corp.'s Q3 results exceeded expectations, but its current-quarter revenue outlook disappointed analysts as tablets continued to soar at the expense of PCs largely powered by the chipmaker - a sharp contrast with the revenue performance of their peers (see table). What should investors do?
Qtrly Revenue Growth (yoy)
Qtrly Earnings Growth (yoy)
12-month price change (%)
For years, Yahoo's stock has been out of favor, as a number of strategic mistakes challenged the company's momentum turning long-term investors away from the stock. Since the hiring of a new CEO Marissa Mayer, Yahoo's stock has rebounded nicely, trading near a 52-week high. Today, it is trading north of $33, well above its 100-day and 200-day moving averages. Anyone who has visited Yahoo's site recently would probably have noticed that it looks different, alive and vibrant.
Yahoo's decline was caused by the failure of the company to recruit and retain the right leadership. In the meantime, Yahoo has been growing bigger by acquiring one start-up after another. Between September 1997, and April 25, 2011, Yahoo acquired 64 companies, often paying a hefty premium like the $5.7 billion it paid for Broadcast.com and $432 million for eGroups. The problem, however, is that most of these companies were in the wrong space, as Yahoo has failed to expand its presence in mobile search and the social media.
Expanding in the wrong direction, Yahoo failed to compete effectively against Google and Facebook. In addition, Yahoo did fail to achieve "economies of scale," the benefits associated with the large size. This can explain why the company has failed to boost its top and bottom lines, disappointing its stockholders.
Yet, Yahoo is trading at a low multiple, below that of Google and AOL; it has reasonable operating margins; enjoys a strong industry franchise; and has taken a number of steps to undo the mistakes of the past, moving the company in the right direction: mobile internet, where growth is - in 2011 global mobile internet subscribers per 100 people increased by 87 percent, compared with 8.5 per 100 people of traditional internet. Specifically, Mayer wants to personalize the Internet, from search, to content distribution, to ads, and e-mail (as she did recently). Will this strategy be executed effectively? Will it help Yahoo catch up with Google?
Judging from the last earnings report, the answer is yes. That's why the stock is a buy, especially at these valuation rates.
Yahoo's SWOT Analysis
New leadership; strong branding; economies of networking
Still suffering from early leadership missteps; a late mover in mobile Internet
Plenty of room to grow - the company is still in the early stages of expansion in the fast growing mobile space
Competition from Google, AOL, and Facebook
The bottom line: With a strong franchise, sound fundamentals, and a new leader who moves in the right direction, Yahoo has a good chance to rise again. Long-term investors may want to accumulate the stock, but always keep an eye on the rapidly changing technology landscape where winners quickly become losers.
Don't count Intel out. The stock is a buy for several reasons:
1. An improving chart. Intel's stock continues to trade below the 100-day and 200-day moving averages, but it has crossed the 50-day moving average, signaling a possible shift in momentum.
2. A low valuation. At $22.60, the company trades close to 70% below its 2000 highs, with its forward P/E below the industry average.
3. An upgrade cycle. According to the Semiconductor Industry Association, global semiconductor sales totaled $25.73 billion in December, up 9.7% from April and 2% from the previous month.
4. Barriers to entry. Binding barriers to entry make the industry an oligopoly that allows Intel -- as a larger player -- to enjoy economies of scale while maintaining pricing power.
5. Increased dividend. Intel has been boosting its dividend for the last five years. It now stands at 4.10%, among the highest in the high-tech industry.
6. Successful transition from PCs to mobile devices. This happened with the introduction of new products like the Atom chip, which powers Windows 8 smartphones.
7. A change in leadership. This is usually followed by new strategic initiatives to improve both the top and bottom lines of the company.
8. An Aggressive Stock Buyback Program. Last quarter the company spent $4.8 billion to buy 190 million shares.
A few words of caution: In the high technology industry, winner takes all. Investors must keep an eye on the growth of Intel's revenues from new products. A big jump will confirm that the contrarian bet is going to pay off.