Seeking Alpha
Long/short equity
Profile| Send Message| ()  

Google's (GOOG) disappointing earnings report isn't a good sign for Yahoo (YHOO), which reports earnings late afternoon on Monday. Analysts' estimates vary from 18 to 31 cents, with the mean estimate of 26 cents. Will the company share Google's fate or fare better?

Given the similarity between Yahoo's and Google's business, I would bet on the former. That's why I will stay away from the stock ahead of its earnings report. Besides, Yahoo has its own problems that have scared long-term investors away from the stock. Over the last ten years, the company had a tough luck in recruiting and retaining the right leadership. In the meantime, Yahoo has been growing bigger by acquiring one start-up after another. Between September 1997 and April 25, 2011, Yahoo acquired 64 companies, often paying a hefty premium like the $5.7 billion it paid for Broadcast.com and $432 million for eGroups. The problem, however, is that most of these companies were in the wrong space, as Yahoo has failed to expand its presence in mobile search and the social media.

Expanding in the wrong direction, Yahoo failed to keep up with Google and Facebook (FB) that have also been growing in the right direction. Worse, Best Buy (BBY) and Yahoo did fail to achieve "economies of scale," the benefits associated with the large size. This can explain why both companies have failed to boost their top and bottom lines, disappointing their stockholders, as both stocks have been heading south.

Yet, Yahoo is trading at a low multiple, below that of Google and AOL; it has reasonable operating margins; enjoys a strong industry franchise; and has taken a number of steps to undo the mistakes of the past. It sold its $ 4.3 billion stake in Alibaba and has recruited a new CEO Marissa Mayer with extensive experience in mobile internet as a previous VP at Google, who is moving the company in the right direction: mobile internet, where growth is - In 2011 global mobile internet subscribers per 100 people increased by 87 percent, compared to 8.5 per 100 people of traditional internet. Specifically, Mayer wants to personalize the Internet, from search, to content distribution, and ads. Will this strategy be executed effectively? Will it help Yahoo catch up with Google? It is hard to say. However, given the low valuation of the stock, the risk/reward ratio is favorable for the buyers of the stock.

Company

Yahoo

AOL

Google

Forward PE

13.69+

28.25+

15.30*

Operating Margin

15.91 %

11.13%

30.76%

Qtrly Revenue Growth (yoy)

-.90%

-2%

35.30%

Qtrly Earnings Growth (yoy)

-4.40%

--

11.20%

*Fye Sep 24, 2013

+Fye Dec 31, 2013

Source: Yahoo.Finance.com

The bottom line: With a strong franchise, sound fundamentals, and a new leader who moves in the right direction, Yahoo has a good chance to rise again. Long-term investors may want to accumulate the stock.

Source: How To Trade Yahoo Ahead Of Earnings