A Speculative Yahoo Options Play

What is the best indicator that Yahoo (YHOO) stock is going to go up this week? The fact that they have yet to accept Microsoft’s (MSFT) bid. The worst case scenario happens for Yahoo shareholders if the company doesn’t meet earnings estimates on tuesday and Microsoft feels that they can lower their offer as a result. If this scenario happens, shame on Yahoo management for not accepting the deal already. Shareholder value trumps any unhappiness at working for Microsoft.

At the end of the day, even the Yahoo employees will be willing to agree to the deal because of shareholder value. Nobody wants to see this stock head back to $20 which is exactly what will happen if Microsoft leaves the scene. With a current p/e of 60 and a forward p/e of 51 this stock is way overpriced. The only way for Yahoo to keep shareholders happy is to come to terms with Microsoft and that's exactly why this deal will happen.

What about the Google (GOOG) hiccup? Google and Yahoo are testing an offering that provides Google search to Yahoo customers. Analysts predict this will be a win/win partnership for the two companies but a deterrent to a Microsoft takeover.

I don’t agree. I think Microsoft would love the profitability that comes from Google’s search superiority. I see the Yahoo/Google partnership happening and I also see a sweetened bid of up to $35/share from Microsoft by next week. It is in Microsoft's best interest to keep the Yahoo employees happy and that only happens with a higher counteroffer. If you’re looking for a speculative play, I recommend buying some May $30 calls. The premium is very low, if yahoo goes up to $33 you will 4x the investment. However, it is highly speculative and only speculative capital should be used.

Comments

[oceandude]

The only flaw in your plan is assuming Yahoo management cares about the shareholders.

[John Capozzi]

I think the May 32.50 will give you more reward. In speculation thought for Mr. Yang to put up such a fight i think Yahoo will post better then expected numbers. At the same time i think Mr. Balmers remarks this morning that he will not raise the bid on any results of qtr numbers was a very poor act of business judgement or he is trying to hold Yahoo share price down. It would be great to see an advance like Google in Yahoo's share price if they beat the street by a wide margin. Just look at the great numbers Allibba which Yahoo owns 40% of and Softbank which owns a major stake in Yahoo Japan had and their great forward looking guidance. This will show in Yahoo's numbers this Qtr and with the weak USA dollar this should also be a positive. Going back to Microsoft with Mr. Balmers comments this morning. You have to ask yourself what is Microsoft going to do in the later years as software becomes some what extinct. You have companies now giving software away for free. This is the core of Microsofts business now. What will they do then when most internet services will come from search and Add revenue? This is a question for food of thought. Mr. Balmer makes the Yahoo merger more harder and will most likely cost him more if Yahoo post an outstanding qtr and plus with AT&T comments this morning about their deal with Yahoo should show much fruit now and into the second half of the year. My advice: Mr. Balmer sit down with Yahoo USA, Allibba and Softbank and in correct business form cement a positive deal for all and get back to business. I beleive that Microsoft and Yahoo merger is the biggest threat to Google it has ever had. On another note we wouldnt be here today if Terry Semel former CEO of Yahoo sold out Yahoo's position in Google.

[WAKEUP]

"Shareholder value trumps any unhappiness at working for Microsoft."
Oh, really? Apparently YOU have never worked at Microsoft. If Microsoft takes over (and they STILL haven't), the best Yahoo employees at all levels will catch the first train, smokin', OUT. Actually, this exodus has already started, stirred up by the mere threat of Microsoft-bosses. Buying scorched earth is not exactly a brilliant business decision, but that's what Microsoft's Steve "Balmy" seems hell-bent, upon accomplishing.

[siliconvalleygambler]

YHOO is surely not GOOG, nowhere near it. This was one of the most boring reactions to earnings. Down 30 cents? A total non-event. I did buy May 30 calls, like you suggested, anticipating some move AH. It was money I could afford to lose, but I wanted a bit more excitement, up or down. Dead money.