Yahoo - Investors Continue To Discount The Company's Cash Balances

Oct.23.12 | About: Yahoo! Inc. (YHOO)

Shares of Yahoo! (YHOO) trade with gains of up to 5% in after hours trading. The global internet company reported a decent set of third quarter results, sending shares to levels around $16.50 in after hours trading.

Third Quarter Results

Yahoo! reported third quarter revenues excluding traffic-acquisition costs of $1.09 billion, up 2% on the year. Stronger advertising demand, resulted in a small revenue beat compared to analysts expectations of $1.08 billion. GAAP revenues came in at $1.20 billion, down 1% on the year.

Operating income excluding restructuring costs came in at $177 million, up from $175 million last year. GAAP net income fell 14% to $152 million. Non-GAAP net earnings per share rose 66% to $0.35 per share. Non-GAAP earnings per share comfortably beat analysts consensus of $0.26 per share.

GAAP net earnings, which include the net gain of $2.8 billion related to the sale of Alibaba shares and $16 million in restructuring charges, came in at $2.64 per share.

During the third quarter, Yahoo! repurchased 12 million shares for a total consideration of $190 million.

CEO Marissa Mayer commented on the results, "Yahoo! had a solid third quarter, and we are encouraged by the stabilization in search and display revenue. We're taking important steps to position Yahoo! for long-term success, and we're confident that our focus on quality and improving the user experience will drive increased value for our advertisers, partners and shareholders."


Yahoo! ended its third quarter with $9.4 billion in cash, equivalents and short and long term marketable debt securities. The company operates without any significant debt.

For the first nine months of 2012, Yahoo! generated revenues of $3.64 billion. Yahoo! reported income from operations of $376 million, or $0.31 per share. Full year revenues are expected to come in around $4.8 billion. Full year operating income, excluding restructuring costs could come in around $0.60 per share, or $725 million.

Factoring in a 5% rise in after-hours trading, the market values Yahoo! at roughly $19.5 billion. Excluding the net cash position of $9.5 billion, the operating assets are valued at roughly $10 billion. This values Yahoo!'s operating assets at roughly 2 times annual revenues and 14 times operational earnings.

Yahoo! has not announced a dividend to return cash proceeds from Alibaba to its shareholders.

Investment Thesis

Year to date, shares of Yahoo! are trading largely unchanged. Shares traded in a relative tight trading range of $14-$16 per share, during the year.

Over the past five years, Yahoo!'s shares have fallen roughly 50%. Shares fell from highs of $30 in 2007 to lows of $10 at the end of 2008. Shares traded around the $15 mark from that point in time. Between 2008 and 2012, Yahoo! saw its annual revenues fall from $7.2 billion to an estimated $4.8 billion in 2012. Net income rose from $419 million to an estimated $4 billion dollar profit this year.

In August of this year, I already urged investors not to panic after shares fell over 5%. The company's new CEO Marissa Mayer said to re-evaluate the company's plans of the multi-billion dollar proceeds from the sale of a 20% stake in Chinese Alibaba. Based on the $7.6 billion in pre-tax proceeds from the 20% stake sale, the remainder of the firm's 23% stake in Alibaba is valued at almost $9 billion, for net proceeds of approximately $6 billion.

If the company sells out the remainder of its stake in Alibaba, net cash balances could total roughly $15.5 billion. Operating assets would be valued around $4 billion, or roughly 0.8 times annual revenues and 6 times operating earnings, which seems highly appealing as the firm's core business is stabilizing.

The entire reason for this appealing valuation of core operations, is the fact that investors are discounting the firm's cash balances. However Mayer already indicated that Yahoo! would return $3.65 billion in after-tax proceeds from its 20% stake sale in Alibaba. The remainder of the proceeds would be spend on acquisitions and investments in the business. In the process, shareholders are still to receive a $3 billion in share buybacks.

Today I reiterate my stance, investors are overly discounting its cash balances in fears of "expensive" acquisitions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.