New Reasons Yahoo Could Tumble 30% By 2013

May.17.12 | About: Yahoo! Inc. (YHOO)

Yahoo! (NASDAQ:YHOO) is one of the first widely used internet search engine companies. Yahoo! is currently in the middle of a company-wide reorganization, primarily because its revenue has declined in each of the last four years, from $7.2 billion in 2008, to $4.9 billion in 2011. The main reason that Yahoo!'s revenue has decreased is because it has been hurt by strong competition from Google (NASDAQ:GOOG) and the soon to go public Facebook (NASDAQ:FB). In an effort to turn the company around Yahoo! hired Scott Thompson as its new CEO in early January. Prior to signing on with Yahoo!, Mr. Thompson served as the president of PayPal's online payment service.

Mr. Thompson's job was to turn Yahoo! around, and in early April he began the reorganization by announcing that the company would be to laying off 2,000 of its 14,000 employees, which would amount to 14% of its workforce. Mr. Thompson told the company's remaining 12,000 employees that he was "revamping the company into three divisions: consumer products, geographic regions, and technology." The company's goal would be to take advantage of Yahoo!'s media properties and the wealth of data it has on its users. It was estimated that the layoffs would save the company about $375 million a year. "The company said it expected to record a pretax cash charge of $125 million to $145 million for severance payments, mostly in the second quarter." It was speculated that Yahoo! needed to reduce its workforce because "The revenue that Yahoo! generated per employee last year was only half the average generated by its peers." Scott Kessler who is an analyst for Capital IQ believes that Yahoo! earned revenue of $353,000 per employee, while Google and Facebook each earned revenue of $1.2 million per employee.

Earnings

Yahoo! reported first-quarter earnings in mid-April. The company reported earnings per share of $0.23, which was a 35% increase from earnings per share of $0.17 in the first quarter of 2011. First-quarter revenue was $1.22 billion, which was roughly equal to revenue of $1.21 billion in the first quarter of 2011. First-quarter net income was $286 million, which was a 28% increase from net income of $223 million, in the first quarter of 2011. While Yahoo! increased each of its year-over-year earnings metrics, it took a step backward from the fourth quarter of 2011, when it reported earnings per share of $0.24, with revenue of $1.3 billion, and net income of $295 million. It is difficult to get a read on were Yahoo!'s earnings will be moving in the future because the company is in the middle of a reorganization and Scott Thompson will be leaving.

Positives for Yahoo! as it moves forward

Yahoo! is still a major internet content provider, which has more than 700 million people visit its website every month. The company increased the amount of visits to its site by 7% in January and February, and in an attempt to further increase usage Yahoo! purchased the start-up Best Site Ever website. On May 11th 2012, Mr. Thompson announced the purchase.

Yahoo!'s stock is probably undervalued because the company owns about 40% of Alibaba (OTC:ALBCF), which is worth more than the $12.8 billion implied by last year's valuation and Yahoo! Japan, which is said to have an $8 billion market value. Yahoo!'s $20.8 billion ownership rights in these two companies does not seem to be reflected in its $18.6 billion market cap.

Negatives for Yahoo! as it moves forward

Yahoo!'s year-over-year first-quarter advertising display sales fell by 4%, also "eMarketer estimates Yahoo!'s U.S. display share fell from 15.4% in 2009 to 10.8% in 2011."

Yahoo!'s first-quarter revenue was 7% lower than its fourth-quarter revenue, while first-quarter net income was 3% lower than the fourth quarter. This is a trend for Yahoo!, which has seen its revenue consistently move downward. From 2008 through 2011 Yahoo!'s revenue has decreased every year by a total of 47%.

Yahoo! is in a fierce legal battle with Facebook regarding numerous patent infringements.

Yahoo!'s stock price has performed poorly. The stock is down by 8.9% over the last year and up by just 4.6% over the last three years.

Yahoo!'s new CEO Scott Thompson has been embroiled in a hurtful scandal. Activist investor "Dan Loeb, founder of Third Point LLC, which held 5.8% of Yahoo! stock as of May 4, 2012, revealed that Thompson's degree was solely in accounting, a fact later confirmed by Stonehill College." In Mr. Thompson's PayPal bio it had been reported that he had a degree in both accounting and computer science. Dan Loeb had called for Mr. Thompson's resignation and May 14, it was confirmed that Scott Thompson will step down from his position with Yahoo!. Mr. Thompson will not receive severance pay and will be forced to surrender unvested stock awards valued at $16 million. It has also been announced that the company's chairman of the board Roy Bostock will be replaced by Fred Amoroso.

Conclusion

Yahoo! has finally begun its long-needed reorganization. The reorganization was desperately needed to reduce cost and increase productivity. Unfortunately, the company's management team is in a state of flux, and that could scuttle the company's reorganization plans. In addition, Yahoo!'s stock price has been flat for years, and since the company does not pay a dividend, there is no incentive to hold the stock while waiting for a turnaround. Internet content providers such as Google and Facebook are trending upwards, and I believe that there are better investments than Yahoo! at this time. At $15, I don't see much value in the stock. Based on the factors discussed above, I anticipate the stock will trade around its 52-week low of $11.09 by late 2012.

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