by Marc Bastow | May 23, 2013 12:38 pm
I’m about five months into my investment with Yahoo (YHOO), and though I still get eye rolls from my editor for being in the stock, I am sitting on roughly 35% returns at this point.
I’m feeling pretty good about where I sit for the time being. However, my target number for Yahoo is $33 — about 25% higher from this point. That’s where I plan to re-evaluate my position (and in full disclosure, where I’ll probably sell at least some portion of my holdings).
So will my faith in CEO Marissa Mayer be rewarded; will Yahoo reach my target here within the next year? It should …
The Tumblr acquisition actually pans out: You’d hope a press release wouldn’t have to start with “promises not to screw it up.” Then again, not many companies have Yahoo’s dreadful track record with buyouts. Among YHOO’s fumbles: GeoCities, Flickr, Del.icio.us, Farechase, Launchcast, My Web, Audio Search, Pets, Live, Kickstart, Briefcase, Webmessenger and Yahoo! for Teachers.
But the one thing all of these have in common? They all predate Mayer.
Maybe, just maybe, this one will be different. If so, Tumblr would help Yahoo tap into a younger, active online user base. And with 300 million monthly unique visitors, 120,000 new signups every day and 900 posts per second, at worst, Yahoo should get lots of new visitors and eyes.
The biggest change to the past formula is that Tumblr will be independently operated as a separate business, with founder David Karp staying on as CEO. Make no mistake: this is huge. Yahoo management is infamous for screwing up virtually everything it touched before; Mayer says she will allow Tumblr to find its own way without corporate interference.
This acquisition is critical for Mayer & Co. If the purchase shows even the slightest amount of early success, her Wall Street cred soars … and so will the stock.
Yahoo can dig deeper into mobile while adding to its products and content: Moving toward mobile is critical, and Yahoo at least seems to realize that. In 2012, Yahoo launched a redesigned homepage geared toward mobile users. Yahoo also launched a new version of its mail product to run across desktop, iOS, Android and Windows 8 platforms.
What’s interesting is Mayer’s view of Yahoo’s mobile future: Less is more. Mayer plans on cutting down Yahoo’s 60 or so available apps to a more workable (and targeted) 12 to 15. The goal is to streamline the offerings away from what Mayer termed “a very scattered product portfolio.”
Of course, you can make yourself as accessible as you’d like, but content still is the key to finding users. So what’s going into those sites?
Yahoo now produces more than 50 original video shows, and it has inked content agreements with ABC News, NBC Sports and CBS Television during the course of the year. In addition, Yahoo added content distribution and promotion agreements with CNBC, Clear Channel, Spotify and Facebook (FB).
Alibaba’s contributions could go bye-bye: Yahoo bought a $1 billion equity stake in the privately held China-based company in 2005, and it’s pretty clear the investment has been a success. In fact, Alibaba is what has pretty much carried Yahoo in past years, and particularly in 2012.
That was no more evident than in September 2012 when Yahoo unwound a significant portion of its investment, selling back 523 million of the 1.047 billion shares it held for $7.1 billion ($13.54 per share). Of the sales proceeds, $6.1 billion came in cash, with $800 million ticketed for preferred shares paying out up to 10% on a semi-annual basis.
The result for Yahoo in FY2012 was $4.6 billion in “other income,” boosting what was an annual operating profit of $566 million (well off from 2011′s $800.3 million) to a net profit of more than $5 billion. Of course, that’s a one-time event — unless Yahoo makes another sale. And it might during the year, as the agreement with Alibaba allows for Yahoo to buy out another 261 million shares when they come to market with a qualified IPO.
This is a big “if.” It’s pure speculation at this moment to affix any time table or price to an Alibaba IPO. That said, should it happen, once the wire transfer clears, you can officially declare the income/cash flow party over for Yahoo. It would help the immediate bottom line and probably result in some sort of payout, but investors would have a darn good reason to get bearish about the long-term.
Or, Tumblr Could Fail: The flip side of the Tumblr potential is if Yahoo screws this one up, too. Initial reaction to the acquisition is that Yahoo paid way too much, but perhaps just as big a fear is that Tumblr employees (and even Karp) just won’t want to work for the “new” company. It happens all the time in Silicon Valley: Cultures clash, egos are damaged, economies of scale lead to layoffs … and next thing you know, all the goodwill and kumbaya moments are gone. Let’s hope that doesn’t happen in the first few months.
Not to mention, immediately following news of the buyout, Tumblr blogs were migrating to WordPress in droves. So Tumblr isn’t necessarily a slam dunk.
Mayer is making a bold move, and while she won’t get a lot of slack on the timing rope, I suspect a verdict won’t come until at least the fall. In the meanwhile, it can concern itself with the world of “integrated online media,” which includes competition from Google (GOOG) and AOL (AOL), among others.
However, momentum and a bit of a halo effect still pervade for Mayer. So I think by the time all this comes to pass, I’ll see my 25%.
But know that once I get that pop, I’m out. I’m not nearly as optimistic about the longer-term.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long YHOO.
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