Jerry Yang and David Filo launched a site called Yahoo! Inc. (NASDAQ:YHOO) from a Stanford University dorm 20 years ago. Yahoo — which jokingly stood for Yet Another Hierarchical Officious Oracle — was far more basic than the YHOO we know today, but still, it made it easier for users to find useful information on the Internet.
And the growth was stunning. Within just a couple years, YHOO stock would hit the public markets, and Yahoo would reach a market cap of nearly $70 billion.
Of course, the story hasn’t been all that happy since then. Yahoo stock has crashed a couple of times since then — once from 2000 to 2002, and again with the rest of the market during the financial crisis.
Still, YHOO stock over the past couple years has told a tale of resurgence, up 125% since the beginning of 2013. So is the once-great search engine company worth taking another look?
Unlike many in the space, I think so.
Whenever you see large amounts of skepticism like you currently do in Yahoo, there’s a chance that an interesting contrarian opportunity lies underneath.
Yahoo has been taking a number of steps to get back on track — no small feat given the advertising competition it has in operators such as Facebook Inc (NASDAQ:FB), Twitter Inc (NYSE:TWTR), Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Snapchat.
CEO Marissa Mayer has been aggressive with unloading underperforming businesses, cutting headcount and experimenting with acquisitions. In fact, three deals are already showing lots of promise:
- Flurry: Flurry is a top provider of mobile analytics, which has a reach of more than 630,000 apps. But YHOO has invested heavily in expanding its offerings, such as with tools to help developers increase monetization and distribution. In other words, Flurry can become a valuable mobile ecosystem that might ultimately help provide a nice stream of ad and transactional revenues for YHOO.
- Tumblr: Tumblr is a fast-growing microblogging system. During the fourth quarter, the number of registered accounts increased from 420 million to 460 million on a sequential basis. Mayer also believes Tumblr will generate about $100 million in revenues for 2015 and reach EBITDA profitability.
- Brightroll: Brightroll allows for the delivery of online videos, which have seen lots of growth on mobile devices. The business also is on track for a $100 million run-rate this year.
All these properties should help boost YHOO stock as the company gets more juice from mobile. Keep in mind that by the end of 2014, Yahoo boasted 575 million mobile monthly active users. The segment also generated $254 million in revenues, up 23% from the prior quarter. According to eMarketer, YHOO is even expected to overtake Twitter as the No. 3 player in mobile revenues in the U.S. market.
The real kicker for YHOO stock is the valuation, which is … well, really cheap. The company currently owns $32 billion, or 15.4%, of Alibaba Group Holding Ltd (NYSE:BABA) — which will be spun off as a separate company in Q4 — and also has a $7 billion stake in Yahoo Japan. Subtracting out these holdings, the remaining value of YHOO stock is about $2 billion. Yet the company is expected to generate $1.2 billion in EBITDA in 2015!
So in light of this, an investor is getting a steep discount on a business that is rapidly being transformed to mobile. And this is certainly tough to find given the frothiness in the space, with Facebook’s EBITDA multiple at 33X and Google’s at 15X.
More importantly, there is a fair chance that Yahoo can actually get back to growing, which will provide even more fuel for the price of YHOO stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
