Yahoo's Fundamentals Make It A Strong Long-Term Buy

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Yahoo (YHOO) has been in the thick of financial news for the past year. Focusing on its turnaround, pundits have advanced different arguments on the internet big wig's fate, with some contending that the turnaround is a pipe dream. However, recent events, coupled with a deeper look at some of the fundamentals, suggest that Yahoo's turnaround is not only real, but that its stock is a strong long-term buy as well.

Qualitative fundamentals brighten beneath the surface

The market is naturally inclined to focus on pompous achievements; those kinds of achievements that are colored with big words and billions of dollars. This inclination, albeit justified, more often than not leads many investors into ignoring the little, yet critically important, qualitative factors that determine a stock's long-term viability.


Yahoo's management will play a vital role in consolidating its long-term prospects. Unlike Microsoft's (NASDAQ:MSFT) Steve Ballmer who has for a long time been synonymous with allegations of bureaucracy, Yahoo's Marissa Mayer has taken a different approach. She actively involves her staff at different levels. Because of this, overall job satisfaction, as measured by jobs and career site Glassdoor, has improved under her reign. On a scale of 1-5, overall job satisfaction comes in at 3.7. This is much higher than her predecessors' Scott Thompson's 3.4 and Carol Bartz's 3.2. Mayer also has an approval rate of 85% among employees. While this pales in comparison to Facebook's (NASDAQ:FB) Mark Zuckerberg, who has an approval of 97%, it is impressive considering she is not a founder.

Why is management important to an investor? If the management can create coherence in the organization, then the company will be able to present a rich product portfolio that not only has good products but that is consistent with current market needs. For investors this will translate into epic gains in the stock market.

Competitive advantage

Yahoo is achieving both operational effectiveness and good strategic positioning. The former essentially means that it's doing normal industry activities better than competitors. Strategic positioning is however the juice. Yahoo! has developed a formidable competitive edge. But before we get into that, how is Yahoo achieving operational effectiveness? According to internet analytics company comScore, Yahoo beat Google (NASDAQ:GOOG) in July traffic for the first time in two years. Through notable overhauls in mail, news, weather, sports and Tumblr, for both desktop and mobile, Yahoo is slowly winning back market share from Google.

The competitive edge that I mentioned earlier comes about when you start looking at the pattern in Mayer's acquisitions. Apart from the undisguised inclination toward mobile and software, all of Mayer's acquisitions focus on startups that serve niche markets. This approach is promoted by Mayer's push for a personalized web as well as advertisers' even greater push for efficiency. By now you all know that software is gnawing into the digital ad business. In fact, the digital ad business is shrinking. In Google's second quarter, cost per click, the average price Google charges on ads, took a 2% sequential dip and a greater 6% year-on-year fall. This decline in prices is primarily because of the impact of software in the ad business. Advertisers are turning away from premium inventory suppliers and moving budgets to affordable and efficient platforms that avail audiences with assured interest. This is what Yahoo is looking to offer through niche software. This approach will take ad targeting to a whole new level as Yahoo will be able to present useful and relevant ads at the very grass roots of the highly fragmented internet market. And considering that Yahoo is gaining numbers, as witnessed by its recent win over Google, it could realize this very soon.

The financials give you all the reason to buy

Looking at Yahoo's financials, the cash flow statement is arguably the only real impressive part. Needless to say, the somewhat strong cash position in the past year was buoyed by the Alibaba deal. But that's not important. What is important is that Yahoo's financials don't stir interest in Wall Street (yet). And that is good. In the past quarter revenues declined 1% year-on-year to $1.07 and Mayer believes that guidance for end-year revenue will be slightly lower than her initial projections.

Sooner or later, when Yahoo's product offering starts disrupting the market, the financials will begin reflecting the improvement. Unfortunately, the stock price will have gone through the roof by then. Already, the stock has risen more than 80% since Mayer's appointment as CEO. This trend could hold going forward; especially after considering the market share that Yahoo is bound to gain in the future. It would be prudent to buy now when the price is still fairly low. Yahoo remains a strong long-term pick.

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.