Yahoo Stock: All Style, Little Substance

by Alyssa Oursler | August 19, 2013 12:22 pm

Yahoo Stock: All Style, Little Substance

Yahoo (YHOO[1]) CEO Marissa Mayer can’t seem to stop turning heads — whether thanks to her telecommuting policy[2], the big-time run in her company’s stock, her showcase of old Yahoo logos[3], or her glamorous photo spread in Vogue magazine[4].

Heck, she’s even been compared to legendary Apple (AAPL[5]) founder Steve Jobs[6].

But all the publicity circling around the search company seems to have a common theme: lots of style, little substance.

Just consider this passage from the Vogue profile:

“Before her arrival in July of last year, Yahoo was being written off by the tech industry, investors, even its own staff. A series of failed CEOs—non-techies from Hollywood, advertising, and finance—had gotten little purchase on the fading technology brand. It was far from clear that a six-months-pregnant, 37-year-old Google (GOOG[7]) engineer and first-time CEO could remove the air of irony that had attached itself to Yahoo’s purple exclamation point.

A year later, the punctuation no longer looks so absurd. Adam Cahan, Yahoo’s head of mobile and another ex-Googler, told me, ‘Yahoo has released more products in the last six months than probably in the last five years.’ But it is the products themselves that represent what he describes as ‘a dramatic cultural shift.’ These include a gorgeous new weather app for mobile phones, a relaunch of the photo-sharing site Flickr, and an update of Yahoo Mail, all of which are drawing the first positive reviews the company has seen in ages. By acquiring Tumblr, the hippest of the social-media sites, Mayer solved the problem of Yahoo’s aging demographics and lack of cool with a single billion-dollar stroke.”

It all sounds great, and it’s hard to argue with Yahoo stock performance ever since Mayer was appointed head honcho last July:

ycharts chart 41 Yahoo Stock: All Style, Little Substance

But as big of a fan as I am of Mayer, the bottom line is simple: A dramatic cultural shift isn’t what’s driving — or what’s going to save — the search giant.

Instead, it is Yahoo’s stake in Chinese e-commerce and Internet giant Alibaba Group — which is only mentioned briefly in the Vogue profile.

As InvestorPlace Editor Jeff Reeves explained[8] after the company’s most recent earnings report:

“The company’s Q2 earnings were riddled with the same problems as always — no long-term vision, a reduced forecast for revenue and profit, and declines in ad rates thanks to a move to mobile.

But none of that showed up in the bottom line because Yahoo earnings beat expectations thanks to its 24% stake in Alibaba.”

John Foley at Reuters recently suggested[9] that 24% stake “is probably worth more than Yahoo’s entire booked assets of $16 billion.”

That’s a much bigger factor than, say, Tumblr. To say Mayer “solved the problem of Yahoo’s aging demographics and lack of cool with a single billion-dollar stroke” is wishful thinking. If it was that easy, another big tech name would have bought Tumblr already. And a younger demographic does little good if it’s not making Yahoo any money. So far, it’s not bringing in revenue, and won’t be until at least next year.

Meanwhile, Yahoo’s share of the search market hit another new low last week, and remains more than 6 percentage points behind second-place Microsoft’s Bing (MSFT[10]).

Yes, Alibaba has been the one running the show.

But while the growth potential in Chinese Internet stocks[11] is evident by the success of other names in the space — such as Baidu (BIDU[12]), Sina (SINA[13]) and Qihoo 360 (QIHU[14]) — the Alibaba tailwind won’t last forever.

The company almost certainly will become its own publicly traded stock — and maybe soon[15]. But while it might seem like Yahoo stock would get a big one-time windfall when that happens (as it has agreed to sell half its shares should Alibaba go public before the start of 2016), Foley also thinks Alibaba might intentionally keep a lid on the IPO price. As he explained:

“A company raising growth funds typically wants a high IPO price, to raise the maximum proceeds for the sale of the fewest shares. But Alibaba is unlikely to raise new money in an IPO. It has plenty of cash, having recently borrowed $8 billion from banks at an interest rate of roughly 4%. If the only shares sold are Yahoo’s, Alibaba’s bosses could be less concerned about a high initial share price and more interested in strong stock performance thereafter.”

One day, investors could be in for a rude wake-up call. But until then, expect the media to keep circling and chattering about Mayer and miss the real point.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  2. thanks to her telecommuting policy: http://investorplace.com/2013/02/more-than-two-sides-to-the-telecommuting-debate/
  3. old Yahoo logos: http://investorplace.com/2013/08/the-30-day-countdown-to-a-new-yahoo-logo/
  4. Vogue magazine: http://www.vogue.com/magazine/article/hail-to-the-chief-yahoos-marissa-mayer/#1
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  6. founder Steve Jobs: http://investorplace.com/2013/07/marissa-mayer-the-next-steve-jobs/
  7. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  8. InvestorPlace Editor Jeff Reeves explained: http://slant.investorplace.com/2013/07/alibaba-stake-is-the-only-reason-to-own-yahoo-stock/
  9. John Foley at Reuters recently suggested: http://tech.fortune.cnn.com/2013/07/31/yahoos-alibaba-problem/
  10. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  11. growth potential in Chinese Internet stocks: http://investorplace.com/2013/08/sina-and-the-chinese-twitter-are-soaring/
  12. BIDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIDU
  13. SINA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SINA
  14. QIHU: http://studio-5.financialcontent.com/investplace/quote?Symbol=QIHU
  15. and maybe soon: http://www.reuters.com/article/2013/08/19/us-alibaba-listing-idUSBRE97I0A020130819

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