Is It Time To Take Profits In Yahoo?

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For those who invested in Yahoo (YHOO), at the time Marissa Mayer joined the company as a CEO one year ago and remain long YHOO today, your investment has already grown 73.53% after a year. That was a smart investment call on your part for investing in a right channel, and for trusting Marissa Mayer to make a major turnaround for the company.

However, your potential earnings will only materialize if you take profits from your investment. The main challenge right now is when to cash in on profits from your Yahoo shares. Should you remain long YHOO, or is it about time to take profits by selling some or all of your position in this lucrative stock?

Take note that Yahoo is not a dividend stock, so the only way to earn is through stock trading, either on a long-term investment or short-term trades. Short-term trading is definitely out of the question, at least for now, since the trend is not a roller-coaster ride but is moving upward. After the impressive first quarter performance of Marissa Mayer, shares remained upbeat.

However, the nine-month rally creates a bit of concern for possible correction any time soon. A negative report can cause shares to tumble and start the correction stage. But with Mayer still at the helm of Yahoo's executive leadership, a correction is still far from the minds of some investors. But there are also signs that tell that the correction is looming, and this could be a hint to start selling your position to maximize your earnings, or to minimize your loss.

Second quarter 2013 earnings call

For the most recent quarter, or Q2 2013, Yahoo reported earnings that beat estimates, but revenue fell short of projections. Its core business, the search and display ads, continue to struggle with faltered figures. The following bullet points summarize the key metrics of the financials.

Up year-on-year

  • Income from operations 150%
  • Net earnings 46%
  • Diluted EPS attributable to Yahoo 68%
  • Free cash flow 41%
  • Earnings in equity interests 25%

Down year-on-year

  • GAAP revenue 7%
  • Revenue ex-TAC 1%
  • Adjusted EBITDA 7%
  • Non-GAAP operating income 13%
  • Display ads 11%
  • Search ads 9%
  • Price-per-ad 12%

Other key highlights

  • Revenue slightly missed analyst estimates of $1.08 billion at $1.07 billion
  • As a result of the low revenue, Yahoo has lowered its revenue estimates for the year from $4.5 billion to $4.6 billion to $5.45 billion to $4.55 billion.
  • Surpassed 340 million monthly users of its mobile app

Based on the above metrics, there are more downs than ups. However, the declines were also minimal compared to the improvements. Even then, the declining revenue and the faltering core business of the company are a major concern.

Despite that, Mayer remains optimistic and views the second quarter as one of the most productive quarters in Yahoo's history. This is based on the fact that Yahoo released dozens of products that include mobile apps for Yahoo Mail, Yahoo News, Yahoo Weather, and Yahoo Sports, among others. It also released several apps for Flickr properties.

From barely a dozen engineers working for Yahoo during the time she joined the company, there are now hundreds of engineers working at her back. According to Mayer, she was already on the second stage of her turnaround plan focused on enhancing the products aimed at growing the traffic for Yahoo.

Some analysts argued if she is truly capable of making a turnaround, given the fact that she is already one year with the company as a CEO and still Yahoo is struggling against its major competitors. However, no one can dispute that Yahoo is better today than it was before Mayer joined the company.

To better assess if Mayer has the potential for the expected turnaround, it would be best to take a short glimpse of what the current CEO accomplished during her first year with the company, as well as her past achievements and recognitions.

Marissa Mayer's one year milestone in Yahoo

  • Completed the $7.6 billion Alibaba deal on September 18, 2012.
  • For the first time since 2008, Yahoo reported its first full year gain in revenue.
  • For the first time in four years, the homepage was redesigned to attract more visitors and to appeal to the varied preferences and needs of the users.
  • Yahoo bought the startup company Jybe on March 20 in a bid to get back to Yahoo's fold the five-member ex-Yahoo engineers.
  • Yahoo bought Summly, an award-winning mobile app that makes reading news stories and web contents easier in a compact mobile screen.
  • Yahoo bought Tumblr for $1.1 billion to attract more advertisers and to increase traffic from the Smartphone and tablet PC users. As a result of the acquisition of Tumblr, more than 50% of the users of Tumblr connect through the mobile app, averaging 7 sessions per day.
  • During the first one-year term of Mayer, Yahoo acquired about 20 companies.
  • Marissa Mayer laid off more than 1,000 workers and took away the work-from-home option. While this angered several employees, her employee rating is at the peak in the five-year history of the company. During her first quarter with Yahoo, her rating was 91%. This was slightly down to 85% in Q2 2013. Still, this is a far cry from the ratings of Scott Thompson and Carol Bartz during the last quarter of their respective stints with the company that averaged 30%. Mayer improved the paid leave benefits to new parents. She also provided several employee-friendly benefits like the free Jawbone Up fitness bands to all workers, and the free food in the company's URLs Café. While she borrowed the 'free food' perk from Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) and Twitter are already giving such benefits to their employees. Nonetheless, these perks significantly improved the morale of many workers).

Marissa Mayer's past achievements before joining Yahoo

  • Member of the Board of Director at Walmart (June 1, 2012)
  • Vice President for Location and Local Services at Google (Oct. 12, 2010)
  • Vice President for Search Products and User Experience at Google (Nov. 1, 2005)
  • Director of Consumer Web Services at Google (March 1, 2003)
  • Product Manager at Google (July 1, 2001)
  • Named Woman of the Year by Glamour magazine
  • Named Young Global Leader by the World Economic Forum
  • Name one of the 50 Most Powerful Women in Business by Fortune at the age of 33

Moving Forward

There is no doubt that Marissa Mayer has all it takes to make the turnaround. However, her strategy seems to be a long-term plan, and it is not just a quick fix for the company. During the earnings call, she gave Yahoo's mobile a rating of 'A,' while projecting that it will be the next revenue driver of the company. Her eyes are now focused on mobile, and her strategy is a mobile-first plan. This, of course, is in line with the current trend as shown by the declining sales of desktop computers and laptops, amidst rising sales of mobiles and tablet computers.

Takeaway Message

Now back to the challenge question: is it time to sell and take profits? Based on the above discussions, I would say give Marissa Mayer additional time to show her prowess and skills to make the turnaround. As stated by her, she is still in the second phase of her plan. Therefore, it is not time to sell yet.

After joining the company, Yahoo was upgraded several times by different analyst firms. First to upgrade was Stifel Nicolaus on Feb. 3, 2013 from Hold to Buy. This was followed by Cantor Fitzgerald from Hold to Buy on March 4, and by Oppenheimer from Perform to Outperform on March 20. UBS and MKM Partners also initiated a Buy rating on April 1 and July 14, respectively.

The majority of the analyst firms recommended a Hold, Buy, and Strong Buy for Yahoo in that order. While this is a bit biased, Nasdaq's analyst firms have somewhat similar recommendations. Majority are Hold, followed by Strong Buy and Buy. So following the recommendations of these firms, now is not the best time yet to sell your position in Yahoo. Take profits later to maximize your gain.

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.

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