Back To The Future With Yahoo Japan

Summary

• Yahoo Japan is trading at a very reasonable valuation for a growing technology company.
• Depressed operating earnings due to long term investments aimed at strengthening the competitive position of the company, together with selling by a major shareholder, pushed shares significantly down.
• A joint venture with SoftBank to work on cashless payments in Japan could potentially become very valuable in the future.

After we tell you that we are excited about Yahoo as an investment you will probably think we have been asleep for the last 20 years, or that we are time travellers from the 1990's. However the Yahoo we are excited about is Yahoo Japan (OTCPK:YAHOY) , a company that started as a joint venture between SoftBank (OTCPK:SFTBY) and Yahoo.

The WSJ created an informative video a couple of years ago on the differences between Yahoo and Yahoo Japan, which is available on YouTube and which we link to below.

While the original Yahoo is now called Altaba (AABA) and is mostly an investment company slowly selling its assets and returning them to shareholders, Yahoo Japan remains one of the most visited websites in the world, with growing revenues and gross profits.

YAHOY data by YCharts

In fact it currently appears in position 35 in Alexa's global top ranking websites. This is higher than ebay at position 40, and not too far from Netflix at position 27 and LinkedIn at position 28.

Source: Alexa Top Sites

This high ranking is consistent with what management has been sharing on the growth in time spent by users. The company actually focuses on logged-in users, which are easier to monetise. Despite PC users trending down, smartphone users have more than compensated, with overall time spent growing nicely.

Source: Yahoo Japan Investor Presentation

This in turn has resulted in growth in advertising related revenue. One possible reason that advertising revenue has grown below platform activity growth is that smart phone users, which are becoming increasingly important, tend to be less tolerant to ads due to the smaller screens.

Source: Yahoo Japan Investor Presentation

On the e-commerce side things are progressing nicely too. The value of goods transacted on the platform continues to increase at a healthy clip, in part to a reduction in fees the company has implemented. This strategy has sacrificed short term profitability for long term growth and value creation.

Source: Yahoo Japan Investor Presentation

While display advertising and e-commerce remain good businesses, what's really exciting is the recent entry to cashless payments. A joint venture between Softbank and Yahoo Japan called PayPay has been launched to target this quickly growing opportunity.

In other countries like India and China some electronic payments start-ups have been able to grab a significant share of the payments market, and a corresponding huge valuation. In Japan cash remains an important form of payment, and the company that figures out how to change that stands to benefit greatly. PayPay will be competing with start-ups such as Origami, as well as established conglomerates Rakuten Inc. and Line Corp.

Source: Yahoo Japan Investor Presentation

Despite the number of companies getting ready to compete for the cashless payments market in Japan, we think PayPay will have a good opportunity to become the dominant player. The company can leverage its position as a popular internet portal to promote their solution, it can integrate it into its e-commerce and auction platforms, and it has a formidable ally in SoftBank that can help PayPay negotiate important collaboration agreements.

Source: Yahoo Japan Investor Presentation

For most of the year shares had been under pressure from market sales by Altaba as it continued its winding down process. Fortunately for investors the Altaba selling process is basically over. It was brought to an end by a complex transaction that included a buyback by the company as well as offering shares to certain company employees. We view this development as positive, as it removes a huge over-hang the shares had, and management should be further incentivised to create long term shareholder value after increasing their investment in the company.

Source: Yahoo Japan Investor Presentation

Valuation

Despite increasing revenue and gross profit, operating income has gone down due to increased investment by the company to improve its long term competitive position. The company calls this strategy investing for new challenges, where it is basically sacrificing some of its near term profitability to assure a stronger competitive position in the future.

YAHOF Operating Income (TTM) data by YCharts

The company is guiding for operating income between 133-143 billion yen, which means the company is currently trading at ~13x its operating income.

Source: Yahoo Japan Investor Presentation

Shares are also trading at approximately ~2x revenues and ~15x net earnings. These multiples appear quite reasonable for a growing technology company, especially considering the huge opportunity in payments with the recent launch of PayPay.

YAHOF PE Ratio (TTM) data by YCharts

Takeaway

Depressed operating earnings due to long term investments aimed at strengthening the competitive position of the company, together with selling by a major shareholder, pushed shares significantly down.

The company is now trading at what looks like a very reasonable valuation for a technology company, even without considering the opportunity in cashless payments. The PayPay JV with SoftBank can be viewed as a free option that could turn out to be very valuable if the company succeeds in becoming one of the main cashless payments platforms in Japan.

(Tipranks: YAHOY: Buy)

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long YAHOY, SFTBY. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.

Comments

[Murasakijisic]

Nice article but I don't quite agree with your thesis. As Rat King above has pointed out, those "long term investments" will need to eventually produce some results or else its just pouring money down the drain.

They have stated that their objectives are to be no.1 in advertising, e-commerce and mobile payment. Those long term investments are largely used to reach those goals, but if you look at where they are now, they still have a long way to go.

Advertising - if you strip away their e-commerce related ad revenue, their total total ad revenue growth is just mid single digit with mobile ad slightly better at high single digit. That is under-performing the whole mobile advertising market in Japan in general and definitely does not match their mobile user growth or time spent on their mobile platform.

E-commerce - they are the distant third behind Amazon and Rakuten and if they want to catch, their GMV needs to be growing at a much rate then just 11%. Remember, they have pretty much waived most fees back in 2013 to induce user traffic to their shopping website so it is not clear how they will driver higher GMV growth going forward.

Mobile payment - As you've pointed out, they are facing a lot of competition e.g. Line just partnered with Tencent and Mizuho to launch their own mobile payment service. It too early to tell who will win but one thing for sure is that they will have to spent huge sums of money to secure market share. And I have to disagree with PayPay being a a free option, they need to spend a lot of money for a chance to come out on top so its not free at all.

So, until Yahoo! Japan has something to show for their investments, it is unlikely for the market to re-rate the stock.

[WideAlpha]

Thank you for the detailed comment HinCC, you have some very good points. Competition is definitely tough and success is far from guaranteed. However it does remind a lot of Tripadvisor last year when investors were complaining about deterioration in the hotel business and increasing competitive pressures, as well as reduced profits because of an increase in advertising investments, and drove shares to a very undemanding valuation. After that expectations were so low that it didn't take much for shares to be re-rated much higher at the first signs of business improving.

[King Rat]

Thank you for the article. A lot of people see the name "Yahoo" and run away but your article does a good job of dispelling that notion.

One point of concern is that while "P/S" has dropped by two thirds in the charts, "P/E" is steady. Meanwhile "gross profit" is rising while "operating income" is stagnant. At some point the "longterm" investments need to start producing some results or Yahoo Japan will be just a high tech version of GE.

[WideAlpha]

Thank you for reading. For sure it will be important that the investments generate results otherwise it would have been better to just return cash flows to shareholders.