One of the original search engines and web portals, Yahoo! Inc. (YHOO) has been on quite a ride in 2014.
Up 27% from where it began the year, YHOO is up over 50% from its 2014 lows. That’s quite a climb for Yahoo, a search engine company that has lost its mojo in recent years.
For example, in the past two years, Yahoo has made 46 purchases for more than $2 billion, but none of them have made much difference to YHOO’s bottom line.
In Q3 2014, Yahoo’s revenue rose less than 1%. That revenue increase only impressed Wall Street because expectations were for a 3% loss, and Yahoo’s income from operations fell from $92.8 million in Q3 2013 to $42.2 million in Q3 2014. Not incredibly inspiring.
So, Yahoo is barely growing earnings and has spent a lot of money buying other firms — at premium prices — that haven’t added anything to the top or bottom. Yet, YHOO stock is up significantly in the past year.
Why?
Two words: Alibaba and wearables.
Yahoo owns 15% of Chinese online juggernaut Alibaba Group Holding Ltd (BABA) that went public earlier this year. Yahoo’s position in Alibaba is now worth around $42 billion. The thing to bear in mind here is that YHOO’s entire market capitalization is $48.5 billion, which means just its position in BABA covers almost its entire market cap.
In less technical terms, at this point, YHOO is a BABA proxy with a potential growth kicker, if it can get its act together in other sectors. If BABA stays on course or rises, YHOO is along for the ride. If YHOO stock can find a way to grow beyond BABA stock, it’s all gravy.
Therefore, YHOO stock is performing well. What’s more, there’s a new sector that Yahoo is planning on moving into that will make its acquisition frenzy look more calculated than random.
Yahoo’s current focus is to get more involved in the wearables market. YHOO is very bullish on the potential explosion of wearables and was one of the initial partners with Apple Inc. (AAPL) in developing software for the Apple Watch.
If you look at the majority of acquisitions that YHOO has made in recent years, most are mobile-based firms. While current CEO Marissa Meyer has been constantly criticized for paying premium prices for companies that didn’t seem to fit into any real value for Yahoo, her long-term strategy may be coming to fruition.
Launching advanced software suites (and potentially devices) based on the growing popularity of mobile computing could be the kind of organic growth that could send YHOO share prices significantly higher.
What’s more YHOO is trading at a price-to-earnings ratio of 6. Google Inc (GOOG) is at 26. AAPL is at 17.
Granted, there’s more risk in YHOO building a business around its BABA base than going with GOOG or AAPL, but the upside could be significant if BABA continues its trajectory and this move into wearables puts YHOO back on the map in its own right.
This mixed picture of risk and opportunity is what gives YHOO a B on the Portfolio Grader, but given the fact that there’s far less downside risk than there is upside potential at this point, YHOO looks very compelling.
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.
