With the much-anticipated Alibaba (NYSE:BABA) IPO out of the way, two key themes will likely dominate Yahoo (YHOO) in 2015. First, YHOO's core business will likely remain weak in the near term due to competition from Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL), so mobile monetization, particularly that of YHOO's verticals, will be important to drive the overall revenue growth. Second, achieving an optimal tax rate for the BABA IPO proceeds will determine YHOO's near-term strategic outlook, given that one point of tax reduction is equivalent of ~$400 million in tax saving that YHOO could use to 1) reinvest in its core business, 2) pursue M&A, and/or 3) return the money to the shareholders. While investors may expect YHOO to return the money, YHOO reminded us that it has been generous with its capital allocation strategy, so potential M&A could be in play for 2015. In short, I remain bullish on YHOO in that its Asian assets are already providing a floor to the share price, and investors are getting free call options on the turnaround of the core business.
Mobile monetization, a near-term driver. Based on the current valuation of BABA and Yahoo Japan, YHOO's stake in its Asian assets implies ~$48 billion in total value. When compared against YHOO's current market cap of $48 billion, the core business is essentially valued at zero, which I do not see to be the case given YHOO's presence in niche verticals such as finance, auto, sports, weather, photo and news. I view YHOO's strong presence in niche verticals to be critical for its mobile monetization effort and positions the company to be the key beneficiary of the ad dollar shift from traditional to digital. While this trend has been well documented, it is worth noting that niche verticals (i.e. auto, sports, finance) and unique platforms (i.e. online video and social networking) are the key beneficiaries within the digital ad space.
YHOO's presence in niche verticals allows the company to monetize each vertical separately and drive growth by going outside the conventional ad-based model and provide adjacent services that are common among Asian vertical plays. For example, Yahoo! Finance could pursue new growth areas by becoming a distributor of wealth management products such as mutual funds or discount brokerage services given its large user base and being the destination for financial news and content. Yahoo Sports could pursue opportunities in fantasy sports management similar to that of FanDuel and later tap into the $380 billion sports betting market once sports betting becomes legal across the US. Yahoo Auto could mimic BitAuto (NYSE:BITA) and Autohome (NYSE:ATHM) by generating revenue from customer referrals or O2O transactions. Finally, Yahoo Weather, which already is one of most popular mobile weather apps, could enter mobile commerce and partner with apparel makers in promoting merchandise based on weather conditions and temperature. In short, YHOO's monetization opportunity for its niche verticals is attractive and has significant potential. The key lies in 1) first to market, and 2) execution. Asian vertical sites have already established to become robust business platforms, and YHOO could certainly learn from its Asian peers on how to unlock the full value of its business.
The tax question with BABA. Tax efficiency will be another key theme that will be on every investor's mind. For every point in tax reduction, YHOO saves roughly $400 million, and this is a significant amount of cash that can be used to 1) reinvest in its core business, 2) pursue M&A, and/or 3) return the money to the shareholders. Management has hinted that tax efficiency can be achieved in the upcoming quarter. While this is largely expected by the market, additional tax reduction could be viewed favorably and is likely to be catalyst for the stock. Many investors are expecting proceeds of the BABA IPO to be returned to them. On the surface, it could be a good strategy, but in reality I believe YHOO is better off pursuing M&A on growth verticals that can offset the weakness in its core business. As I have mentioned earlier, digital ad dollars are shifting into niche verticals, SNS, mobile, and apps are replacing search engines as the resource for queries. That said, YHOO should reinvest the money into its niche verticals and pursue M&A in mobile-oriented companies, such as Yelp (NYSE:YELP), TripAdvisor (NASDAQ:TRIP), HomeAway (NASDAQ:AWAY) and Expedia (NASDAQ:EXPE), to strengthen its presence and solidify its mobile penetration. While investors will certainly be disappointed at an M&A strategy, YHOO will come out to be a much stronger company, in my view.
Remain bullish on YHOO in 2015.
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