Who Was on the Right Side of Yahoo’s Post-Earnings Flip-Flop?

by Marc Bastow | April 17, 2013 2:50 pm

Who Was on the Right Side of Yahoo’s Post-Earnings Flip-Flop?

Just before InvestorPlace Editor Jeff Reeves left the office Tuesday, he came to my cubicle to let me know Yahoo (NASDAQ:YHOO[1]) had released disappointing earnings, the stock was cratering in after-hours trading — down nearly 5% at the time — and that I was wrong about Marissa Mayer & Co.

This morning, I got to slide him a note that said, “YHOO up 18 cents per share, hovering near $24.”

He thought I was lying.

I wasn’t.

Reeves and I have been down this hallway before[2] when I bought the stock back in early January. My thesis was simple: I believed Yahoo had enough juice in its existing business model to move forward from prior management screw-ups, and that Mayer had the chops and the star power to make it happen. I wasn’t looking for a grand slam, just a small profit in a year or two.

But clearly there were two pools of traders and investors playing with Yahoo near the bells. One set violently reacted to Tuesday afternoon’s earnings news, and the other saw something positive Wednesday after a bit of digestion, before the stock finally muddled to nearly flat after a couple hours.

Which party was right? Well, let’s dig in.

The Report

Let’s start with the recent financial news that Reeves was telling me about so breathlessly. In a word, it was: yuck.

Revenues fell far short of Wall Street estimates as traffic to its website continued to decline, taking display advertising right down with it. Total revenue declined 7% as display ad revenue — which makes up roughly 40% of Yahoo’s revenue, declined 11% — mostly at the hands of Facebook (NASDAQ:FB[3]) and Google (NASDAQ:GOOG[4]).

Worse yet, Yahoo’s guidance for second-quarter revenues of $1.06 billion to $1.09 billion fell short of the consensus call for $1.1 billion.

Earnings shot up 36% year-over-year to $390 million, though much of that bump was due to the outstanding performance of its China-based Internet partner Alibaba Group, in which Yahoo holds a 24% equity stake. So, really not a ringing endorsement for optimism, either.

However …

The Positioning

The quarter wasn’t a total bust, though. In the past three months, Yahoo has …

You’d like to see better numbers, but I like these pieces of news as things that will help YHOO down the road.

Meanwhile, Mayer has turned around the culture of the company in her short tenure, if by no other means than killing the telecommuting mentality[5]. It was a controversial move, and I’m not here to defend or rebuke it, but it did send a pretty strong message that Mayer believed Yahoo’s workers had gotten lazy sitting in front of their computers in bunny slippers.

Indeed, Business Insider report says Mayer took a look through Yahoo’s Virtual Private Network numbers[6] and discovered that lots of folks used the old policy to take time off. Far from increased productivity, slacking off was more the norm.

I’m sorry for those who truly need a telecommuter life, but for the rest, good for Mayer.

Yahoo also continues to expand its reach through acquisitions and partnerships, completing the purchase of six startups – Stamped Inc., OntheAir, Snip.it, Alike, Jybe and Summly — since last July, and the binge shows no signs of slowing down. These deals are all designed to either bring in talent and technology focused on mobile apps and social networking, or provide additional content to draw in more consumers.

Also, back in March, an AllThingsD report quoted Yahoo M&A head Jackie Reses as saying the company was in talks to acquire two “major” companies[7], with speculation focusing on Hulu, Tumblr, Pinterest and Zynga (NASDAQ:ZNGA[8]). Yahoo sits on nearly $6 billion in cash and short-term investments, so it’s not unthinkable.

Bottom Line

Anyone who sold off Tuesday evening couldn’t be blamed for doing so after looking at those numbers, which show a clear slowdown of business momentum — especially considering many were probably taking profits from a nearly 50% gain in the past few months.

But considering the ideas Yahoo has on deck and the aggressive stance it’s taking toward turning the ship around, dip-buyers couldn’t be blamed, either, for utilizing Wednesday’s quick dive.

Personally, I like the way that second camp thinks.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long YHOO.

Endnotes:
  1. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  2. been down this hallway before: http://investorplace.com/2013/01/5-reasons-why-i-just-bought-yahoo-yhoo-msft-aol-amzn-goog/
  3. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  4. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  5. killing the telecommuting mentality: http://investorplace.com/2013/02/more-than-two-sides-to-the-telecommuting-debate/
  6. Mayer took a look through Yahoo’s Virtual Private Network numbers: http://www.businessinsider.com/how-marissa-mayer-figured-out-work-at-home-yahoos-were-slacking-off-2013-3
  7. acquire two “major” companies: http://allthingsd.com/20130307/loose-lips-yahoo-ma-head-tells-employees-company-looking-at-two-significant-and-a-half-dozen-small-buys/
  8. ZNGA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ZNGA

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