Yahoo Is Still A Fantastic Value For Investors

Aug.18.14 | About: Yahoo! Inc. (YHOO)

Summary

A slightly disappointing Q2 does not detract from the long-term prospects of Yahoo's core business.

CEO Marissa Mayer has been aggressively trying to bolster Yahoo's core business.

Yahoo is also building shareholder value and confidence leading up to Alibaba's IPO.

The second quarter did not go as well as Yahoo (NASDAQ:YHOO), or the market, had hoped. There was a slight sell-off, but the stock fully rebounded within a month. In fact, since releasing their Q2 results, the stock is up 12% from its low on July 18, and up over 4% from its pre-Q2 release price on July 15. At this point, investors are not very concerned about the numbers coming out of the front office, rather they are focusing on Yahoo's investments, which is where the majority the company's value is. Not to detract from what CEO Marissa Mayer has done; no one could have predicted a core business turnaround like this three years ago. But the fact is, currently Yahoo's investments vastly overshadow its core business.

Increasing Yahoo's Core Business Value

Management knows investors and traders are heavily interested in Alibaba (NYSE:BABA). During their last earnings call, about half of the questions were regarding the Chinese company. CEO Marissa Mayer and CFO Kenneth Goldman had to respectfully decline to answer a few of the questions because of the company's involvement in the Alibaba IPO, and they are currently in a "quiet period" between the IPO filing and when the stock actually begins trading on the New York Stock Exchange. But Marissa Mayer has repeatedly stated that her priority is to grow Yahoo's core business. The company will be keeping half of the proceeds it receives from the IPO for that purpose. In the mean time, the company is not staying idle.

Yahoo recently acquired Flurry, a mobile advertising and analytics company, in order to increase revenue from mobile devices. Mobile ads are not as profitable as desktop ads, a big reason why revenue decreased for Yahoo while mobile viewership increased. Flurry is a major step in combating that problem. Flurry Analytics is currently used by over 170,000 developers and sees app activity from over 1.4 billion devices every month. The company makes money through its AppCircle ad network. Flurry Analytics is free to use for all developers, but AppCircle uses that data for targeted advertisements. Flurry is essentially a much needed middle man in mobile, that pairs advertisers with advertising platforms (in this case, apps) through the data they collect. These targeted ads generate more revenue than a normal mobile ad. Flurry President & CEO, Simon Khalaf, stated that if an app reaches the 100,000 user mark, it can begin generating real revenue that can support a small company. With Yahoo's 450 million mobile users (a 30% increase year over year) this is a boon for both the company and investors. The added benefit of the acquisition is the revenue it will generate from sources outside of Yahoo, which they previously did not have access to.

Outside of Flurry, acquisitions like Ray-V and partnerships such as the deal with LiveVision should bolster Yahoo's services and attract more demand towards its products. Acquisitions alone will not fix the company, but they will help the company reach its goals at a quicker pace.

Increasing Shareholder Value

This is where Yahoo looks very appealing. The market knows Yahoo's investments are worth more than the company's current market cap (valuations vary wildly from $100 billion - $150+ billion, but this is the consensus), essentially giving Yahoo's core business a negative valuation. Management has been aware of this for some time and has been aggressively trying to increase shareholder value. During their Q2 earnings release, CEO Marissa Mayer and CFO Kenneth Goldman detailed the measures the company is taking to increase shareholder value.

First is the reduction of the shares Yahoo is required to sell during Alibaba's IPO. This is actually the second reduction the two companies have agreed upon. As of April, Yahoo currently holds 523.6 million Alibaba shares. About a year and a half ago, Yahoo was going to sell 262 million shares during the IPO, or 50% of their shares. That was then reduced to 208 million shares, or roughly 40%. The current count is 140 million, or 26.7% of the Alibaba shares they hold. There is a lot of speculation on the reason behind this reduction; some believe this is due to the budding relationship between the two companies, while others think this was intentional in order for Alibaba to buy Yahoo, and in turn, regain their shares at a price well below what they will potentially be trading at in the market. Either way, Yahoo investors were likely thrilled to hear that information. If Alibaba's share price increases substantially when it begins trading (as many expect it to), it should add additional value to Yahoo shares as well. If not, it will still present an opportunity for investors to buy Alibaba shares, indirectly, at a price below their market value.

Management has also been keen to increase shareholder value by aggressively buying back shares. Chief Financial Officer Kenneth Goldman stated during Yahoo's earnings call that the company has bought back over $6 billion worth of shares over the last two years; they bought back $719 million worth of shares during the second quarter alone. The buybacks have reduced Yahoo's share count by 7% in that time frame. The company plans to continue their buy back program throughout the year, but I expect their efforts to be even more aggressive with the extra cash they will have on hand after the Alibaba IPO. Long-term investors frequently support share repurchases, and with Yahoo shares currently undervalued, the program should continue to make investors very happy.

Finally, Yahoo shareholders should be particularly pleased with CEO Marissa Mayer's plan for the proceeds acquired during the Alibaba IPO. CFO Kenneth Goldman stated during the Q2 earnings release that Yahoo is "committed to returning at least half of the after-tax IPO proceeds to shareholders". This is good news for both Yahoo bears and bulls. Many people were concerned with how management would utilize the billions of dollars of cash they'll soon have. And although we can likely expect strategic acquisitions -- like the ones mentioned above -- to continue, a dividend to shareholders, the most direct form of increasing shareholder value, should ease some of those worries.

Conclusion

Marissa Mayer's quest to mold Yahoo into the go-to destination for people's daily habits is far from complete. The building blocks are in place, but so is a lackluster income statement. Increasing the monetization of their free services, particularly in mobile, is obviously the most critical obstacle on the road to increasing the value of Yahoo's core business. However, numbers don't lie, the company's investments are where the true value lies. For investors willing to hold on to this stock, you are essentially getting portions of Yahoo Japan and Alibaba at book value, and getting a company with 450 million monthly active users and the 4th most visited website in the world, for next to nothing. Yahoo is a fantastic value right now, but it all depends on whether investors buy into Marissa Mayer's vision for the company and her recent efforts to increase mobile monetization.

Disclosure: The author is long YHOO. 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.