Yahoo (YHOO) shares have risen 22% in the last three months with fresh volume coming on the news that it has a huge stake in one of the most-anticipated initial public offerings of 2014 — the Chinese e-commerce company Alibaba (BABA).
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Can Yahoo sustain this rate of price appreciation?
Company Profile
Yahoo is one of the world’s largest internet corporations. With nearly 12,000 employees and operations in 25 countries, Yahoo is widely recognized for its namesake web portal, search engine and email service. Yahoo calls itself the “world’s largest start-up” and has been a testament to how quickly new opportunities can open up in the tech sector.
However, Yahoo has hit a somewhat bumpy patch and is experiencing margin compression. For fiscal 2014, Yahoo is expected to post 1.7% annual sales growth and just 6.6% earnings growth. Of course, those estimates may be revised lower once analysts process Yahoo’s latest quarterly announcement.
Industry Buzz and Earnings Outlook
The Alibaba IPO is today, Sept. 19, and it might be the biggest tech IPO ever. The build-up has definitely given Yahoo a boost, especially since YHOO has a 22.4% stake or $23 billion after-tax. Yahoo has committed to sell 140 million shares at the IPO, which nets about $5 billion after-tax.
However, the most important factor for investors is how Yahoo plans to use its new found money. Ken Goldman, CFO of Yahoo says, “We are committed to return at least half of the after-tax IPO proceeds to shareholders.” That’s a great first step, but there will likely be a few billion dollars left to fuel growth — perhaps through acquisition. Still, no specific plans have come from Yahoo.
I remain optimistic about Yahoo as it’s up by 22% in just the last three month. While its second quarter earnings weren’t stellar, we may see some interesting moves from Yahoo near-term with the Alibaba IPO. Yahoo anticipates Q3 sales in a range of $1.02 billion to $1.06 billion, below the Street view of $1.1 billion.
Current Ratings
Yahoo spent much of 2013 and the second quarter of 2014 in “buy” territory, but in April, I downgraded YHOO stock to a “C-rated hold.” Now, YHOO stock looks like it has a solid level of buying pressure scoring a Quantitative “B.”
On the fundamental side, Yahoo receives a “C” overall because YHOO receives less-than-stellar grades for six of the eight metrics I grade it on. Yahoo receives a “F” for sales growth and operating margin growth as well as a “D” for earnings growth.
With new money coming in from the Alibaba IPO, we may see some these grades shift. Yahoo receives an excellent “A” for earnings momentum and a solid “B” for cash flow.
I consider YHOO a “B-rated buy.”
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
