A lot of excitement has built up around Yahoo! Inc's (NASDAQ:YHOO) stake in Alibaba. When Alibaba starts trading in U.S. markets, its stock could shoot up on the first day, making Yahoo a proxy trade for Alibaba. What concerns me is that even after Yahoo raises a large chunk of cash from its 140 million share sale, it could end up wasting billions, eroding away shareholder value.
Revenue declines, again
In Yahoo's latest quarter it reported that revenue ex-TAC (traffic acquisition costs) fell by 4% year-over-year to $1.04 billion. The current CEO, Marissa Mayer, has been in charge since July 2012. Back in the second quarter of 2012, Yahoo's revenue ex-TAC was $1.081 billion, a tiny increase versus the same quarter in 2011. Over the course of two years and after numerous acquisitions, Yahoo has yet to see any revenue growth.
Over that same time frame, Yahoo's non-GAAP income from operations has been flat. In the second quarter of 2012, Yahoo made $190 million in income from its operations, down $1 million compared to the same quarter in 2011. In Yahoo's latest quarter, it made $191 million in income from its operations. Declining revenue and stagnant profits doesn't sound appealing, especially as this comes after Yahoo aggressively bought up new companies.
To put this lack of growth into perspective, look at Google Inc (NASDAQ:GOOG) (NASDAQ:GOOGL). In the second quarter of 2012, Google grew its revenue by 35% year-over-year to $12.21 billion, $9.61 billion ex-TAC. Fast forward to the second quarter of 2014, and Google was able to grow its top line by 22% year-over-year to $15.96 billion, $12.67 billion ex-TAC. Over the past two years, Google has been able to grow its revenue ex-TAC by 32%, while Yahoo has floundered. Google isn't the perfect apple-to-apple comparison, but it does point towards Yahoo lagging behind.
Marissa Mayer has overseen $2 billion in acquisitions since she was promoted, including $1.1 billion for Tumblr, yet revenue ex-TAC is still down. Some might point towards revenue growth in the future once Yahoo is able to better monetize its purchases, but as they say, I have to see it to believe it.
What to do with all that cash
With the extra cash from the Alibaba sale, Yahoo plans distributing at least half of it back to shareholders. Last quarter, Yahoo bought back ~21 million of its shares for $719 million. Yahoo pays out no dividend, so it would probably buy back additional shares. A lower share count would boost per share metrics and give investors a bigger stake in the company, rewarding shareholders with something.
The downside of this is that Yahoo is still planning on keeping roughly half of the cash it generates from the sale. If Yahoo makes $5 billion - $6 billion in after tax proceeds, then it would have a cash balance of over $10 billion. Factor out $3 billion or so in share buybacks, and Yahoo could easily go on a massive spending spree with the remaining cash.
My point of contention would be if Yahoo was unable to properly monetize its previous purchases, why would its future deals be any different? Instead of spending cash on what could end up eroding shareholder value, like its $50 million purchase of Qwiki, why not institute a dividend or reduce its share count further?
When Alibaba finally has its IPO, there could be plenty of upside to be had. But if Yahoo takes its cash hoard and continues its spending binge, then that upside would quickly disappear a year or two down the road. Yahoo will still have a stake in Alibaba, but that stake will be 140 million shares smaller. Maybe Yahoo will buy that perfect company and everything will be forgiven, but generally speaking, if you don't learn from your past mistakes you are bound to repeat them in the future. This isn't a buy or sell recommendation, merely a warning that shareholders might get short changed.
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.