Yahoo! Inc. (YHOO) has been in a downward spiral of late. Now the company plans to downsize. The question is: Will that be enough to turn Yahoo stock around?
YHOO shares are down 33% in 2015, and the company’s earnings declined 98.5% last quarter. The company also took a $42 million write-down after its failed experiment to stream former NBC hit Community. Things have gotten so bad at Yahoo, in fact, that the company has hired a management consulting firm to help it decide what areas of the business to focus on — and what to cut.
During its third-quarter earnings call last month, YHOO CEO Marissa Mayer said cuts are imminent.
“As we move into 2016, we will work to narrow our strategy, focusing on fewer products with higher quality to achieve improved growth and profitability,” she said.
YHOO is technically still profitable, though EPS did dip into negative territory (-$0.02) in the second quarter. And despite falling well short of analyst expectations, sales have actually improved year-over-year the last two quarters.
But while the company is on track for its best sales year since 2012, the fact of the matter is that revenues at YHOO today are only about two-thirds of what they were in 2008.
Yahoo Stock Still Expensive
As for Yahoo stock, it’s not exactly a bargain buy despite losing one-third of its value in the past 10 months. The stock still trades at 59 times next year’s earnings estimates, with a trailing P/E ratio of 135. By comparison, Alphabet (GOOG, GOOGL) trades at a mere 22 times 2016 earnings estimates despite gaining 42% year-to-date.
Reorganization could ultimately help YHOO — and more importantly, Yahoo stock. Right now, the company seems to be a jack-of-all-trades, master of none. It has a search engine, advertising services, news sites such as Yahoo Finance and Yahoo Sports, email, instant messaging, and at least until a few weeks ago, original content. With the exception of Yahoo Finance, all of those businesses are a distant second (or worse) in their respective fields.
Google’s search engine and email are far more popular than Yahoo’s. Yahoo Sports is a burgeoning entity, but not one that can compete with the likes of ESPN.com yet. And the company’s attempt at delivering original content like Netflix (NFLX) was an unmitigated disaster.
So what has to go for YHOO to become more efficient?
Getting out of original content was a good start, albeit a painful one. The search engine and email businesses would seem like the next most logical choices to cut since both seem to be dying a slow and painful death thanks to Google. Given that YHOO just struck a three-year Internet search and advertising deal with Google, however, it doesn’t appear that Yahoo is getting out of search just yet.
Yahoo Finance and Yahoo Sports are the areas in which YHOO is thriving. Its mobile, video (non-original, that is) and social businesses are growing too; sales in those categories were up 42% in the third quarter. Those are the areas in which YHOO should be investing most of its attention — and money.
Image Problem Killing YHOO
Regardless of what area of the business Marissa Mayer decides to jettison in 2016, YHOO has an image problem right now. Unless it can quickly repair that image with the American public — and, by proxy, Wall Street — Yahoo stock may be doomed to another rough year in 2016.
My advice? Don’t buy Yahoo stock until we know what the company will be cutting — and what it will be focusing on.
Warren Buffett says, “Buy what you know.” And right now, YHOO doesn’t even know what it is.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
