I'm sure you are all familiar with Yahoo and maybe even use their products on a daily basis. I won't elaborate too much on a business description here, but instead provide insights as to why a long position in YHOO could provide tremendous upside to your portfolio. Yahoo had their lunch eaten by Google in the past few years and I think this trend is about to change. Central to my investment thesis are the following points: 1. World class management team; and 2. Discount to sum of parts.
World Class Management Team:
CEO: Marissa Mayer, a Stanford graduate with a B.A. in Symbolic Systems and M.S. in Computer Science, was Google's 20th employee when she joined the fledgling company in 1999. During her 13 years at Google, she oversaw the design of numerous well‐known products and was responsible for its iconic home page design. Mayer is a leading innovator in Silicon Valley whose creative vision made her a critical part of Google's leadership team. - Third Point 2nd Quarter Investor Letter
While at Google, Mayer developed close relationships with highly skilled tech grads in her Associate Product Management program at Google. Mayer still has close contracts with these highly prospective tech geeks. Mayer has also taught +3000 grad students at Stanford University.
It's said that Marissa does not sleep, she is dedicated to work. Recently, she had a baby boy and returned to work full time 2 weeks later!
CFO: Goldman brings more than 30 years of experience in financial, operational and business management. He joins Yahoo from Fortinet, a provider of threat management technologies, where he served as CFO. Prior to Fortinet, Goldman spent nearly six years as senior vice president of finance and administration and CFO of Siebel Systems, until the company's acquisition by Oracle Corp. in January 2006. He has held CFO positions at Excite@Home, Sybase, Cypress Semiconductor and VLSI Technology. Goldman has served as a director on several public and private sector boards and has been named among "America's 15 Most Connected Capitalists" by Forbes magazine. - Yahoo Finance
COO: Henrique de Castro is one of the most respected and accomplished businesspeople in the realm of Internet advertising. With his rigorous and analytical approach, he'll lead Yahoo's strategy and execution in enhancing advertising solutions and the value that Yahoo provides to advertisers.
Discount to Sum of Parts:
When purchasing share of Yahoo you are essentially buying 3 companies: the core Yahoo Business, Alibaba Group, and Yahoo Japan. According to the 3rd quarter 2012 conference call: "At the end of the quarter, the market value of our stakes in Yahoo Japan and Alibaba Group was $7.7 billion and $8.1 billion, using the quarter end closing price per share and the price per share in the most recent transaction, respectively." Assuming 45% tax rate and fees on the sale of these assets, we get:
- Alibaba group: $3.68 per share
- Yahoo Japan: $3.43 per share
The Yahoo core business also has a great balance sheet that we should take into account. Recently, Yahoo had an influx of cash due to the sale of half their stake in Alibaba. Current assets less TOTAL liabilities equates to:
- Net cash: $4.35 per share
When you add this all up, we get $11.46 per share in non-core, non-producing assets. The majority of the cash captured from the recent Alibaba sale will be used to repurchase shares as management has stated on the most recent conference call: "In addition, as you know, in September, we reviewed our capital allocation strategy, and we committed to return $3 billion of additional capital to our investors from the Alibaba transaction. At the current price levels, we think it's economically attractive to repurchase stock." There is reason to believe that once the remaining Alibaba stake and Yahoo Japan stake are sold, this money too will be used to repurchase shares provided the price of Yahoo remains at current levels.
After we shed these assets, we're only paying $5.19 per share for the core Yahoo (current price $16.65 - $11.46).
I believe Yahoo can easily earn ~$.85 per share (or $1 billion as it did in 2010 and 2011). This estimate is conservative being that the old Yahoo management regime earned $ .85, Yahoo now has a new world class team at the helm that can earn even more.
This means we're looking at a P/E of 6.1 for the core Yahoo
Google, Yahoo's closest competitor, has a P/E of 18 after ex-ing out cash. In my opinion, Google does not have the growth potential as Yahoo does. Both Google and Yahoo P/E's should at least be on par, which would bring Yahoo to:
$26.76 per share. (Google PE 18 * Yahoo Earnings 0.85 + $11.46 per share in non-core)
For a sanity check, Third Point 2nd Quarter Investor Letter reads:
"While the travails of "core Yahoo" grab all the headlines, core Yahoo forms only a modest portion of the Company's actual value (a mere $1.50 per share, trading at ~$14.49 as of 03/12/12). The after-tax value of Yahoo's Asian assets - Alibaba and Yahoo Japan - currently constitutes $11 per share of its value (76%), with an additional $2 per share of net cash...."
Although Yahoo Is a terrific sum-of-the-parts play, there lies additional tremendous upside in the new team's ability to grow the business. I can only think of Steve Job and Apple in my comparison to Marissa Mayer and Yahoo.
"As the world becomes increasingly mobile, the way we all consume content has dramatically shifted. Interestingly, when you look at the most frequent uses of smartphones, they include checking the weather, checking sports scores, checking stock quotes and other financial information, watching videos, sharing photos, getting the latest news and playing games. Does that sound like any particular company that you know?" - Marissa Mayer, on 3rd quarter 2012 conference call.