Marissa Mayer has the arduous task of turning around Yahoo's (YHOO) declining revenues and waning public interest. As the firm's new Chief Executive Officer is making the most of her appointment by building a dream team of C-level executives and consolidating firm operations.
Investors need to review how Yahoo's market value stacks up against in order to prudently assess this stock as a potential investment.
Smart Asset Disposals
Yahoo is well-funded by sales proceeds from its roughly $3 billion stake in Alibaba. According to analysts, Yahoo will either initiate a dividend policy or buyback more shares. Yahoo already used $646 million to buy back stock following its sale of Alibaba. The board is still deciding what to do with the remaining money from the transaction. Investors might want the dividend, but those looking for a long term relationship with the company would rather see a repurchase.
Analysts anticipate that more share repurchases could boost Yahoo stock to as high as $32 in a year. Shares are trading at $17 for a total market capitalization of about $20 billion. This is modest compared to search engines and social networks which range anywhere from $50.5 billion to a whopping $251.8 billion in market capitalization. However, it is unclear how analyst forecasts of $32 per share could materialize from less than $2.5 billion in buybacks from a pool of $20 billion in current market capitalization.
Yahoo is not done consolidating operations. It plans to shut down its operations in South Korea at the end of the year. It is planning to inject company's resources in those areas of the world where the environment is more feasible and secure for the company to target the internet users.
Sunnyvale, California-based company Yahoo said that Seoul-based Yahoo is facing challenges. Yahoo Chief Executive Officer Mayer was hired to lure back the internet users from Google (GOOG) and other social service providers, Twitter and Facebook (FB). However, the real competition in South Korea comes from local firms such as NHM. NH Investment & Securities Seoul-based analyst Kim Jin Gu explained by phone,
People don't use Yahoo much here, and it's not generating much traffic. There's no reason for them to stay in this Far East Asian market.
He further stated that Yahoo accounts for only one percent of South Korean searches, whereas NHN and Daum Communication account for more than ninety percent of the Web-search inquires in South Korea.
Yahoo Executive Dream Team
As a new CEO, Marissa Mayer has made extreme changes in the firm's upper management line-up. She recently named Henrique de Castro as her pick for the chief operations officer position. Mayer worked with De Castro during her years at Google. Before being picked up by Yahoo, De Castro was vice president of Google's partner business solutions worldwide.
In September, she planned to install Ken Goldman as Yahoo's chief financial officer by late October. Goldman has three decades of experience working with technology-oriented companies. He had been brought in to make serious financial decisions like he did for Fortinet (FTNT). His success in making companies more profitable and efficient has made him an ideal choice for to the Yahoo CEO and shareholders.
Mayer also installed Kathy Savitt as chief marketing officer. She was previously an executive at American Eagle Outfitters (AEO).
Marissa Mayer's ability to recruit and hire these executives is a victory unto itself. Before Mayer was CEO of Yahoo the company was not always able to attract or keep key hires. The director of North American Research for Bloomberg Industries said;
Its recent history has been one of losing top talent. On this score, Marissa Mayer appears to be having a positive impact.
Yahoo Peer Comparison
Yahoo has many large competitors that direct web traffic and organize web content. They trade at different valuations that reflect a range of enthusiasm for the future prospects of each stock.
AOL (AOL) is a Yahoo competitor from long ago in the dial-up modem era. Regardless of age, investors could find value in AOL shares at $34 per share. AOL shares are trading at a bargain 3.3 price-to-earnings ratio, less than half the 14.2 average price-to-earnings ratio of the S&P 500 index. The price-to-book multiple of this stock is a steal at 1.03, cheaper than the 2.07 S&P 500 average. Investors should consider this number to be a lowball estimate, because the price-to-book ratio fails to account for internally-developed intellectual property including brands, patents, and trademarks, all of which could have as much economic value as tangible assets. The firm's average 1.49 price-to-sales ratio does not detract from the value of AOL since it is in line with today's prevailing market multiples.
Google is a little younger than Yahoo, and may be thought of as its nemesis. Google stock currently trades at prices near $675 per share, which is pricey in terms of valuation. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.32 while this stock has a much higher 4.64 ratio. GOOG shares currently trade at a high 21.15 price-to-earnings ratio, a higher value than the 14.2 average of the S&P 500 index.
These valuations are in stark contrast to those of Facebook. This stock trades at roughly $22, a price level is just too expensive to be reasonable. Equity in this company is rich on a price-to-sales basis since shares trade at a 10.9 multiple, widely higher than the 1.32 the S&P 500 average. FB shares are trading at an indefensibly high 121.9 price-to-earnings ratio.
Bear in mind that there is no limit to how much market participants will bid up stock. At price multiples that are higher even than Facebook, LinkedIn (LNKD) stock trades at roughly $105, a price which implies freakishly high valuations. Equity in this company is rich on a price-to-sales basis since shares trade at a 15.3 multiple, more than ten times the 1.32 the S&P 500 average. LNKD shares are trading at an indefensibly high 871.3 price-to-earnings ratio.
Aside from AOL, Yahoo is easily trading at lower valuations than its peers near $17 per share. Yahoo shares currently trade at a high 18.9 price-to-earnings ratio, a higher value than the S&P 500 index. The price-to-book multiple of this stock is 1.61, cheaper than the 2.07 S&P 500 average. On the other hand, the price-to-sales multiple of this stock is high at 3.99. In this sense it is expensive.
It looks like Marissa Mayer is whole-heartedly trying to alter Yahoo by making big changes. Since successfully changing the executive team and consolidating the firm, the market is now eagerly watching what Yahoo will do going forward.
Since Yahoo's current price multiples are a bit pricey, investors should wait to buy into this story. Investors seeking value among Yahoo peers should consider AOL, and should avoid Facebook and LinkedIn. Google is somewhat more attractively priced than either Facebook or LinkedIn, but like Yahoo, it is not trading at compelling price multiples.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.