Yahoo (NASDAQ:YHOO) reported a miss on revenue and in line earnings, but the reality for YHOO is that the market continues to discount the value of its core business given that its valuation will continue to be driven by the value of its Asian assets and the potential tax impact of unlocking those assets. At the current valuation of its Asian assets, the core business accounts for less than 5%-10% of YHOO's implied true value, so clearly YHOO's stock movement will be dependent on the ups and downs of its Asian assets rather than its core growth. As such, investors will have to wait longer for an update regarding the asset sale or any other strategic options. I reiterate my bullish view on YHOO given that I believe the Asian assets provide an attractive floor to the share price and that any sale and strategic actions could unlock further value in the stock.
YHOO's quarter can be best characterized by a miss on revenue ($1bn, -15% y/y) and in line EPS of $0.13 on better than expected cost cutting. MaVeNS (mobile, video, native advertising and social) revenue of $472m, +26% y/y, remains a growth driver for YHOO, while non-MaVeNS revenue was essentially flat. More important, mobile revenue of $291m, +15% y/y, suggests that YHOO's mobile properties continue to hold up despite the growing competition from mobile messenger and digital media platforms.
In conjunction with the earnings, the company announced another strategic turnaround plan which sounds more reasonable in my view as it focuses on fewer products and a more simplified business model to enhance execution. In summary, YHOO will focus on mail, search and Tumblr in terms of platform and news, sports, finance and lifestyle as its strategic verticals. Additionally, YHOO will focus on its Gemini and BrightRoll ad products. Ideally, YHOO would like to execute on all these platforms, but mobile will likely take greater precedence after growing 36% y/y last year.
I'm positive on Tumblr and believe that it could drive part of YHOO's mobile growth, but competition is certainly there, with platforms such as Instagram and the mobile messenger ecosystem such as WeChat and LINE. On the other hand, management is quite bullish on mobile search and its potential of offering differentiated products that consumers can use. With Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google already in search and Facebook (NASDAQ:FB) potentially entering search, it is difficult to see how YHOO could differentiate. While I hope the company can turn around its mobile search, it is a long shot and I can argue that many analysts are not baking this into their models as they wait on the sidelines to see evidence of execution. While search continues to see growth challenges, it is difficult to see how YHOO can return to positive EBITDA growth.
Finally, guidance once again came in weak, suggesting that 2016 will be another transition year. I remain bullish on YHOO given its M&A prospects.
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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.