Should I Buy Yahoo? 3 Pros, 3 Cons

by Tom Taulli | July 15, 2013 1:41 pm

Yahoo (YHOO[1]) will be one of the most-watched companies this week, as it reports its second-quarter results tomorrow after the close.

The Street is looking for earnings per share of 30 cents and revenues of $1.08 billion — numbers that Yahoo should be able to hit. The company has continued to buy back shares, which will boost the EPS picture, and the projected revenues are essentially flat on a year-over-year basis.

Instead, Wall Street probably will look to how Yahoo is progressing on mobile as well as its mergers & acquisitions strategy — especially considering its mere headlines have helped propel the stock to nearly 40% gains year-to-date.

So, should you buy Yahoo, expecting the stock to keep up the momentum, or should you be wary heading into the report? To see, let’s look at the pros and cons:

Pros

CEO Marissa Mayer: Mayer has been a lightning rod, helping to keep YHOO relevant and in the news for positive reasons, not just its failures, as was the norm before her hiring. But Mayer is more than just about PR; she has tremendous knowledge of product development, which she focused on as a Google (GOOG[2]) executive for years. She also has taken steps to increase productivity, such as with her move to push back on home-based workers, and has a keen vision of making Yahoo mobile-first.

Mergers & Acquisitions: A key element of Mayer’s strategy is aggressive dealmaking. During the past year, she has snapped up 17 companies. While many have been small operators, featuring merely a handful of employees, this is fine — Mayer is targeting brilliance, not numbers. That said, Mayer hasn’t been shy about larger deals, such as the $1.1 billion purchase of Tumblr, the high-growth microblogging site and mobile operator.

Assets: Even after selling a $7.6 billion stake in Alibaba — a top e-commerce player in China — Yahoo still owns 24% of the company. With Alibaba looking at an IPO (which could fetch a valuation of $100 billion), this holding could remain quite lucrative; in fact, this possibility has been a big driver for Yahoo’s stock so far this year. Yahoo also owns 35% of Yahoo Japan, which is part of a joint venture with Softbank (SFTBF[3]). That asset could bring in over $6 billion.

Cons

Valuation: Thanks to YHOO’s run-up this year, the stock now trades at a somewhat frothy 18 times next year’s earnings; compare that to just 10 for Apple (AAPL[4]). In other words, Wall Street has some lofty expectations for Yahoo and believes Mayer will be able to spark growth.

Display Ads: For the past few quarters, Yahoo has lost market share in this important category. In Q1, it fell by a grueling 10% to $455 million. While some of the recent dealmaking should help improve things — especially Tumblr — the fact remains that Google and Facebook (FB[5]) remain tough competitors and could continue to swipe revenues. Facebook has the huge advantage of more than 1 billion users that provide massive amounts of useful data, while Google has its own horde of data, plus a tremendous platform of properties like YouTube and Android.

Search Ads: This has been another big problem for Yahoo. The business suffered a 10% drop to $425 million in Q1. Search can be a lucrative business, but the competition is fierce, and Google remains the clear-cut leader. More importantly, GOOG’s Android operating system has given the company a huge edge in the mobile market.

Verdict

Mayer has brought cool back to Yahoo — no one’s questioning that. But really transforming the business will take some time.

The problem is that Wall Street has already factored in lots of potential good news in Yahoo’s stock price. Thus, any sort of stumble — say, in earnings — could make YHOO vulnerable to selling. Plus, nothing Yahoo reports tomorrow will pull Facebook or Google out of the advertising game.

So should you buy Yahoo? No — for now, the cons outweigh the pros.

Tom Taulli runs the InvestorPlace blog IPO Playbook[6]. He is also the author of High-Profit IPO Strategies[7], All About Commodities[8] and All About Short Selling[9]. Follow him on Twitter at @ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.

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Source URL: https://investorplace.com/2013/07/should-i-buy-yahoo-3-pros-3-cons-2/

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