So, Yahoo! Inc. (NASDAQ:YHOO) is up 25% in the past six months and 27% for the year. The S&P 500 is up 5% and 16% over the same periods, respectively.
What does it take for Yahoo stock to get a little respect?
I guess, at this point, the simple answer is, “more.”
The skeptics argue that YHOO is really just an Alibaba Group Holding Ltd (NYSE:BABA) proxy, and the rest of its business model beyond holding BABA — like Yahoo! Japan and its lack of growth in the U.S. or Europe — doesn’t get investors hearts racing.
What’s more, Yahoo’s confusing strategy (at least to the outside world) of paying premium prices for small tech firms that don’t seem to fit into any broader strategic model seems to push investors away more than lure them in.
Yes, Google Inc (NASDAQ:GOOG) is diversified, but there’s a method to Google’s madness that seems more calculated than Yahoo’s attempts thus far. GOOG can launch a major initiative, like Glass, and fail, and no one thinks its the end of the Google.
YHOO has been quietly — and not so quietly — buying firms, but we have yet to see anything come of these moves. After a while, this doesn’t build investor confidence.
But that’s a long-term issue for YHOO stock. In the short and medium term, BABA stake is carrying the value of Yahoo stock pretty well.
However, if BABA collapses, YHOO will be hammered on its losses because Yahoo stock has no other leg to stand on to keep its value elevated. That risk is why YHOO scores a B rating on the Portfolio Grader.
On the upside however, spinning off its BABA shares into another company is very shareholder friendly. And at this point, Yahoo stock is undervalued — BABA represents $36 of every YHOO share, which values the rest of YHOO’s business at $8 a share at current prices.
Granted, this wouldn’t be the case if YHOO would demonstrate a clear vision for its long-term future. And that’s the risk. It’s also the opportunity.
If BABA is down, YHOO is down. And that makes YHOO a great way to play BABA through a filter. And, since YHOO isn’t spinning off BABA shares until later in the year, YHOO management has some time to breathe and find a way to explain what Yahoo is planning to do beyond being a shareholder of BABA.
There’s talk that once the BABA shares are spun off, YHOO will be ripe for a takeover. And given the rise in online consumers in Asia, it could very well be purchased by a big Asian player looking for a foothold in the U.S.
Yahoo CEO Marissa Mayer has done a good job through her tenure to build shareholder value but her next steps could prove to be her master stroke or death knell. YHOO shareholders can count on Marissa Mayer and her team doing all they can to deliver value until they can pull the trigger on a growth strategy for Yahoo stock.
And given Yahoo stock’s price these days, it’s worth the risk to get in now to get hold of YHOO and BABA.
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.
