Why You Should Sell Shares Of Yahoo Now

| About: Yahoo! Inc. (YHOO)

Yahoo! Inc (NASDAQ:YHOO) is one of the big names in internet services. Along with Google Inc (NASDAQ:GOOG) and AOL Inc (NYSE:AOL), there are not many internet users that do not use its services in their time in front of the computer screen. Whether it’s connecting to others via a Yahoo! Email account, or using its instant messaging offering, using its search engines, or looking up news items, the chances are that most readers of this article will use Yahoo! services.

Yahoo! Inc shares are currently trading around $16, and the mean 12 month price target from analysts researching the stock is $17.54 (9.6% upside potential). This stock is trading higher than its 50-day exponential moving average of $14.62 and its 200-day exponential moving average of $15.07. These averages have flattened out after showing a gradual decline from May through August, as the shares fell from their 12 month high of $18.84 to their 12 month low of $11.09. This dramatic fall was in part due to weaker than expected results for the second quarter 2011 but more due to the posturing by the Alibaba Group (OTC:ALBCF) over the jointly owned Alipay, a payments company in China. The arguments over ownership were resolved at the end of July, and since this time Yahoo! shares have regained their poise in the market. Earnings per share for the last year were $0.88, though these are expected to fall to $0.83 in its next fiscal year (ending Dec 2012). These numbers place the shares on a trailing price-to-earnings ratio of 18.23, and a forward multiple of 19.37.

Like its main rivals, Google and AOL, Yahoo! does not pay a dividend.

Current operating margin at Yahoo! is 15.16%, with a return on assets of 3.62% and a return on equity of 9.45%. The current revenue from its income statement is $5.57 billion, though revenue as reported in its second quarter showed year-on-year decline of 23.30%. The company has cash of $2.55 billion, and a total of just $40 million in debt. The company’s debt/ equity ratio is 0.31, lower than AOL’s 5.16 and Google’s 13.24.

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Looking at the 12-month chart, Yahoo! has regained ground lost in the middle of the year, and is now trading on a par over the 12 month period with the S&P 500 (NYSEARCA:SPY) Index, and is faring a little better than Google. The recent rise has been aided by bid talk surrounding the company, with Alibaba and Microsoft (NASDAQ:MSFT) both considering a purchase. Indeed, analysts valuation of Yahoo! centres around the $16 to $18 mark, some way below the $33 per share that Microsoft offered for the company three years ago.

Yahoo! is in play and seems keen to find a suitor, or a combination of suitors, that will be willing to pay top dollar for the company. The share price has reacted accordingly, though has still not reached its 12-month high. This is a deal that seems likely to go through, though the identity of the eventual buyer remains to be seen. If the potential buyers were to pull out of any potential deal, the share price would fall back. With speculation of price and eventual bidder in the public domain, I believe there is greater downside risk than upside potential. Investors should avoid for the time being, perhaps waiting until the terms and eventual buyer are known, and then only buy if wanting to own shares in the combined group. AVOID.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.