Yahoo: Momentum Could Send The Stock To $27

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Yahoo Inc. (YHOO) jumped on Wednesday on news that the Internet company has acquired the email and address book management app Xobni. This acquisition, the third in as many days, reminded market participants, at some point, Yahoo will finally boost its web traffic and revive its stagnant sales growth. Investors can definitely be excited about this.

Yahoo stock has climbed over the past two trading sessions rebounding from below the $24 level which was breached in late June.

Yahoo has clearly received a boost after this Xobni deal. It is the latest in a string of acquisitions that is in keeping with CEO Marissa Mayer's hope to turnaround the fledgling tech giant. Yahoo has already acquired two mobile apps this week with Bignoggins Productions being purchased on Monday and then Qwiki on Tuesday. Qwiki is a great addition to Yahoo's portfolio of products and services as it enables users to create mini-movies with their collection of photos and videos. Additionally, Bignoggins Productions assists consumers who enjoy playing fantasy sports like the extremely popular Fantasy Football genre.

Yahoo Inc., still has a very attractive P/E ratio of 7.5, no debt on its books and a profit margin of 65.66% in 2012. Although, Yahoo does not pay any dividends, the stock is trading very close to its 52-week high of $27.68 per share. The three year EPS growth rate is a robust 44.83% while the recent quarterly change is an impressive 52.17%. Nonetheless, sales growth over the last quarter was -6.62% and the three year revenue growth rate is also negative at -10.38%.

Technical Picture

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Technically speaking, Yahoo looks good and the stock is likely to test the 50-day moving average [MA] of 25.87. A break of this level would see a test of the mid-May highs near 28, which is above the 14.59-27.68 52-week range. Long term support for Yahoo is at the 200-day MA of 21.20.

Momentum is beginning to change with the Moving Average Convergence Divergence (MACD) index close to generating a buy signal as the spread (the 12-day MA minus the 26-day MA) is close to crossing above the 9-day MA of the spread. The buy signal is confirmed by the index histogram which is ready to move from negative to positive territory. The relative strength index (RSI) has moved from oversold territory near 30 in late June to a print of 49 which is in the middle of the neutral range.

A low risk option trading strategy on the stock is a risk reversal. An investor can purchase a 28 August call and sell a 22 August put simultaneously. If the stock price dips down near support at 22 an investor will find value in the stock and buy it at that level (from the short put option). If Yahoo's stock price keeps climbing the investor will be rewarded with the long call option. At the current stock price of $25.59, the risk reversal would have no cost for an investor.

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Implied volatility on Yahoo stock has risen with the pop in the stock price lately. The 34% level is mitigated by the concurrent sale and purchase of the two call and put options. Investors can benefit from a potential upswing of YHOO stock without paying a premium since time decay is neutral.

Conclusion: Yahoo is not finished yet

Yahoo closed its $1.1B acquisition of blogging service Tumblr last month and this was the biggest deal since Mayer took over. Now we have the plan to integrate Xobni's technology into its email and instant messaging services in a deal that is estimated to be between $30-$40M according to the technology blog AllThingsD.

AllThingsD has also estimated that the Qwiki app purchase would have cost anywhere between $40M to $50M. Yahoo's efforts to build up its mobile offerings have paid dividends and it has led to a 70% rise in its mobile email usage and a 50% rise in Flickr photo uploads from a mobile device.

The other good thing is that Yahoo's search business has kept improving, despite the tough competition from Google (GOOG) Facebook (FB) and Microsoft (MSFT). Still, Yahoo has a big challenge ahead and that is to get users to visit its properties and spend more time on them. If YHOO can succeed in this tough task, it will be able to recoup much of its lost market share going forward. With the fast growing digital ad market, this will be crucial in increasing revenue growth.

With all that Yahoo has going with it, we are very confident in the firm's long-term potential.

Disclosure: I am long YHOO.

Business relationship disclosure: This article was written by a research analyst at Investor Aide. Investor Aide is not receiving compensation for it (other than from Seeking Alpha). Investor Aide has no business relationship with any company whose stock is mentioned in this article.

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