Yahoo: Limited Downside, With Potential For Google-Like Returns

| About: Yahoo! Inc. (AABA)

When Yahoo! Inc. (YHOO) announced yet another CEO pick, I was not too impressed. The stock went up, however, on news that former Google Inc. (NASDAQ:GOOG) employee Marissa Mayer would lead the company. There is good reason to doubt decisions made by Yahoo's board, since it missed out on opportunities to sell the company to Microsoft Corporation (NASDAQ:MSFT) for about twice the current share price. It also tried, but failed to buy Facebook (NASDAQ:FB) years ago, when the valuation was (by comparison) mere pocket change and, of course, it has not delivered the mobile strategy or ad growth like other companies such as Google. While many tech companies have innovated and prospered, Yahoo's shares have been stagnating for years and that has led to investor frustration and skepticism.

The decision to pick Marissa Mayer to "turnaround" a company that some seemingly well-qualified people have repeatedly failed at, brings up a couple of concerns. One is that she has not previously been in the CEO position for any major company. It's also disheartening to see the board of directors throwing what some have reported to be about $70 million in a pay package for Ms. Mayer to take the job. Too often, executives are paid outrageous sums and leave the company while the shareholders are left holding onto losses.

Putting those issues aside, I am actually getting a bit more bullish about the prospects for Ms. Mayer to create something out of the many valuable, but poorly monetized assets that this company has in place. It was recently reported that she is reviewing plans whereby shareholders could have received a special dividend after the company completes an asset sale to Alibaba for about $4.2 billion. Instead she might put that money to use in other ways, including acquisitions. Investors have since dumped the stock on this news and it traded from about $16 to nearly $15 in a single day. At this level, and with lower investor expectations, I like the stock. I also believe that this decision is a sign that Mayer wants to create something out of Yahoo, and not just be presiding over the asset sales and distributions of a ever-diminishing company. She clearly has many contacts in the industry and armed with billions in cash, there is a good chance she can hire talented engineers, revamp existing programs and even make some key acquisitions.

I don't see much downside in the stock after the recent drop to $15, and with lowered expectations, it looks like it's time to start buying a little. Yahoo has a rock-solid balance sheet, with about $1.91 billion in cash and almost no debt. That cash balance is expected to grow, once the recently announced asset sale is complete. If Mayer does not turn the company around you might still have a $15 stock, but if she creates real change and innovation as she did at Google, develops new ideas and acquires some hot tech start-ups, (Google has acquired over 100 companies in the past few years), the rewards could be very worthwhile for patient shareholders. It seems clear that she has brought some Google spirit and business methods to Yahoo, and that just might lead to Google-like returns one day.

Here are some key points for YHOO:

  • Current share price: $15.00
  • The 52 week range is $12.45 to $16.79
  • Earnings estimates for fiscal year 2012: $1.03 per share
  • Earnings estimates for fiscal year 2013: $1.17 per share
  • Annual dividend: none

Data is sourced from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

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