Should You Buy YHOO Stock? 3 Pros, 3 Cons

Advertisement

Since the dot-com implosion in 2000, Yahoo! (YHOO) has mostly been about disappointment. There were missed opportunities, such as not purchasing companies like Facebook (FB), Twitter (TWTR) or even Google (GOOG, GOOGL). There was also the turmoil with the succession of CEOs who could not get things back on track.

yhoo alibabaUnfortunately, for the current year, YHOO stock has remained in the doldrums. So far, the stock is down grueling 22% to about $39.

But perhaps there may be an opportunity here for value investors? Maybe so. And to see, let’s consider three pros and three cons of holding YHOO stock:

YHOO Stock Pros

Transformation. Since coming on board YHOO in July 2012, CEO Marissa Mayer has been working hard to reinvent the company. To this end, she has pursued an approach called the “virtuous cycle,” which involves a focus on people and products as a means to attracting better traffic and increased revenues. And she’s getting traction: YHOO has once again become a company that is attracting lots of talent, receiving nearly 43,000 job applications in the first quarter. And it’s making strides in terms of products: a big part of the strategy has been to jettison non-performing products and focus on those that provide the most potential for growth. Just look Mayer’s heavy investments in Yahoo! Mail, which has become a key part of driving mobile traffic. And there are key acquisitions, including Flurry (a provider of mobile analytics), BrightRoll (operates an video ad network) and Tumblr (a microblogging service).

Online Video. The market has certainly been red hot lately, especially as seen with the huge success of Netflix (NFLX). Well, it looks like YHOO is making a big play for the market as well. The company has hired notable media personalities like Katie Couric and has also purchased the rights to various TV shows, like Community and The Pursuit (similar to Friends). And YHOO has been moving into events programming.  Consider that the company purchased the rights to live-stream an NFL game this fall, and there is a partnership with Live Nation, which involves broadcasting concerts every day.

Capital Allocation. Mayer has been fairly disciplined, returning $9.4 billion to shareholders since becoming CEO and reducing the number of shares outstanding by 27%. During this period, she spent about $2.1 billion on M&A transactions. The balance sheet is also solid. In all, there is $6.9 billion in cash. Mayer also said she will return at least half of the proceeds of the Alibaba (BABA) spinoff to shareholders. This could be as much as $15 billion.

YHOO Stock Cons

Competition. YHOO recently turned 20 years old. While this is a testament to its durability, the fact is that the brand is kind of drab. In its place, there are a variety of new operators that have taken leadership positions and have grabbed significant market share away from YHOO, such as Google, Snapchat and Facebook. Even the struggling Twitter has had a better performance, and is expected to displace YHOO as the third largest online ad player in the U.S.

Display Ads. In the latest quarter, ads dropped by 7% to $381 million. In fact, display ads have fallen for four straight quarters. One reason for the falloff is the shift from desktop to mobile. But there is also something else that has become a big problem: programmatic advertising. This involves using sophisticated systems to better target advertising. It also looks like this has resulted in overall lower demand for operators like YHOO because advertising can be more selective. To deal with this, the company has been getting more aggressive with mobile and video. But so far, these categories have not been enough to offset the drop.

Alibaba. YHOO plans to spin off this asset at the end of the fourth quarter. Keep in mind that the total value is roughly $32 billion. To maximize the transaction, YHOO plans for the spinoff to save a whopping $10 billion. But as should be no surprise, the details are extremely complicated and there are fears that the IRS will refuse to approve the transaction. Granted, Mayer believes that things are on track. But given the massive size of the tax savings, it seems that the IRS will likely attempt to get a chunk of it.

The Bottom Line

Turning around YHOO has not been easy. Let’s face it, the company had struggled for a long time and also had to deal with tough rivals. But so far, Mayer has made a good shift to mobile. Consider that there are now more than 600 million monthly active mobile users.

Yet perhaps the most compelling part of YHOO stock  is the valuation. Besides the BABA asset, there is also a major holding in Yahoo! Japan. Adding both of these with the current cash balance, the total is about $50 billion.  However, the market cap of YHOO is only $37 billion!

Shouldn’t the other assets like Yahoo! Mail, Tumblr, BrightRoll and Flurry have some value? I think so. And over time, this will probably be realized as YHOO continues to monetize its portfolio of assets.

So, should you buy YHOO stock?  Yes — the company is definitely trading at compelling value and there could be catalysts from key investments in mobile and video.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll 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.

More From InvestorPlace

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/buy-yahoo-yhoo-stock-3-pros-cons/.

©2024 InvestorPlace Media, LLC