Something's Going On At Yahoo - Expecting More Upside

Sep.17.07 | About: Yahoo! Inc. (YHOO)

RBC Capital is out positive on Yahoo! (NASDAQ:YHOO) saying the management is making some smart moves to fortify its lead in display ads, despite significant short-term pressures. Search revenues may be helped by discounting payouts to affiliates, some of which have little effective recourse.

Relationships with Comcast, eBay, and Bebo have improved the quality and demographic mix of Yahoo's third party display inventory. The Blue Lithium acquisition may prove brilliant as Yahoo gains the internal capability to mine its massively valuable registered user data.

Jerry Yang's 100-day review is unlikely to lead directly to Meg Whitman's doorstep, the firm believes, as shares of Yahoo are so depressed. Any bold moves to reduce overhead and partner with Google for backfill monetization could send shares back to $28-$30 range.

A sale of YHOO still remains plausible one day for EBAY, NWS, CMCSA, T, and MSFT, even at higher levels. Conversely, if the company were to invest its way out of the current mess, RBC believes shareholder activism could invite dialogue with potential suitors anyway. They believe this creates a heads-you-win, tails-they-sell scenario which favors shareholders over the next 12 months. Maintains Outperform and $34 target.

Notablecalls: Something is going on at YHOO for sure. Just take a look at the price action on Friday. Part of it can be attributed to positive comments from Bernstein highlighting steps that could potentially restore Yahoo's growth and profitability, potentially unlocking between $960 mln and $1.6 bln in annual operating income, and leading the firm to raise their price target to as much as $45. Also, part of it may be technical as the stock was indeed forming a bottom around the $23-$24 level. Also, Sept 25 calls saw sizable volume with over 20K traded.

YHOO has made smart, albeit small acquisitions over the past couple of months. Yet the market seems to be anticipating bigger news of some sort. I suspect YHOO stock may continue to appreciate over the coming weeks.

Disclosure: no positions