Buy YHOO Stock – You Just Can’t Fight the Math on Yahoo

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Yahoo! Inc. (NASDAQ:YHOO) has been under pressure since about Thanksgiving. In the fall, YHOO stock finally got its highly anticipated bump as a result of the Alibaba Group Holding Ltd. (NYSE:BABA) IPO and early run-up in shares … but as BABA stock has faded, so has Yahoo.

yhoo alibabaThat seemed to be changing Friday morning as YHOO stock popped about 3% in early trading on news that the Internet company was upping its buyback plans by $2 billion, funded in part by its Alibaba windfall.

So should investors see Yahoo stock as a buy right here, as CEO Marissa Mayer makes good on her promise to finally deliver cash back to shareholders? Or is the buyback plan doomed, just one more distraction meant to obscure the fact that YHOO stock is circling the drain as its domestic advertising-based Internet business fades away amid the end of “portal” sites and the rise of Facebook Inc (NASDAQ:FB)?

While I have no plans to bet on the long-term future of Yahoo, I do think it’s the former.

Yes, Yahoo stock buyback plans can’t put YHOO back on track overnight, but when you look at the assets of the company and the simple math of the balance sheet, it’s hard to deny this company isn’t getting a fair shake on Wall Street.

YHOO Stock Down, Not Out

Yahoo is not doomed for bankruptcy anytime soon. The company is well capitalized, with $8 billion in cash and short-term investments, plus a whopping $44.6 billion in long-term investments after its Alibaba windfall. And that’s stacked up against just $1.3 billion in total debt.

Do the math and you’ll find that YHOO stock is currently trading well below cash and investments minus debt, with a market cap of about $43 billion.

Why? Well, because Wall Street is pricing in a discount based on the underlying investments of BABA stock — which, by the way, haven’t performed that well as of late. Also, analysts are rather bearish on the core Internet business of Yahoo.

Still, there are many on Wall Street who think that even these headwinds can’t keep Yahoo down. Price targets are 20% to 30% higher from here, with a median price target of $58.50 for YHOO stock. That includes a spate of recent bullish calls after January earnings and increased forecasts from Credit Suisse and MKM, among others, who increased targets to $69 and $61, respectively.

That’s not just because of optimism about its BABA stock investment and eventual spinoff of those assets, but also because January earnings actually showed a small beat on the bottom line despite continued revenue pressures at Yahoo.

Now, all this can unravel in the next earnings report — particularly if Alibaba continues to drift lower and YHOO investors don’t get a commensurate bump from their related stake in the Chinese Internet company.

However, there are reasons to think both Yahoo and Alibaba have brighter days ahead.

If you’re unwilling to invest in Alibaba directly after some recent volatility in shares and the very recent IPO that has prevented long-term visibility into operations, then consider buying YHOO stock instead.

Things are better than they seem — and an extra $2 billion in buybacks will keep EPS figures looking good going forward.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/yhoo-stock-buyback-yahoo-repurchase/.

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