- Yahoo has shaky revenues, yet excellent profit margins.
- Yahoo stock has appreciated even though the company hasn't done much better - a sign of positive investor sentiment.
- Yahoo owns $26 billion worth of Alibaba, a number which could skyrocket based on the e-commerce giant's initial public offering.
Yahoo (NASDAQ:YHOO) has been in the news a lot within the last several years. In between a hot new CEO with a lot of momentum, a large stake in what may be the largest e-commerce firm in the world, and the directionless flailing of the core business itself, Yahoo and its investors have a lot to keep track of. Let's take a fundamental look at the company's operations to see whether the stock is at good entry point right now.
Yahoo's revenues haven't been doing too well. As you can see from the graph below, revenue topped out during 2008 and has been heading downwards ever since; the revenue growth has been in the negatives for a while, albeit not too horribly. What's interesting to note is that the stock price has actually kept on climbing for this time period. This is indicative of investor sentiment; investors think that Marissa Meyer, the CEO, has what it takes to turn the company around.
The company isn't loaded with debt, as some might expect. Yahoo's balance sheet is actually quite healthy, with the firm having assets to match its liabilities. Liabilities as a whole have barely shifted in the last several years, although the firm has continued to accrue assets.
The firm's cash flow is erratic, a potential indication that it can't rely on cash from its own operations for every quarter; that being said, it may not need more than a certain level of cash every quarter in order to operate smoothly, as evidenced by the graph below.
Keep in mind that Yahoo is a technology company; it takes in double-digit profit margins, with the most recent quarter boasting a profit margin of 27%. That's good business. As to whether now is a good time to enter the stock, we can take a look at the firm's price-to-earnings ratio. This graph is extreme in the sense that Yahoo has been trading at an extremely low historical multiple for 4 years. This could be the new norm, or it could indicate a certain investor wariness - although this isn't likely, since the stock has continued to appreciate during this time.
Fundamentally, Yahoo looks good. Everything except the revenue seems to be there, although Yahoo is making excellent margins on the revenue that it does have. The firm needs to expand the gross size of its business, and it could attract a throng of investors. Also worth keeping in mind is the $26 billion stake that Yahoo has in Alibaba. This number could, and should, go up significantly when Alibaba actually has its initial public offering. The activity around that time should make more investors aware of this ownership and the continued efforts of Marissa Meyer to push her business forward - leading to a gain in the stock. Right now, Yahoo looks like a buy.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.