So it turned out that Yahoo’s (YHOO) plan for 2015 was to distract investors with the complicated attempt to spin off its interest in Alibaba (BABA) after it abandon that plan last week.
You might want to point out it was Uncle Sam who decided not to grant Yahoo stock its proposed tax-effective spinoff. But I’d say if Yahoo stock had to file for special tax consideration as it did, then it was always a 50-50 situation at best. That’s too much of a gamble to have placed the entirety of 2015 on.
Perhaps that’s why institutional investors have been on its back since it announced the abandonment of the Alibaba spinoff. Canyon Capital and SpringOwl Asset Management LLC have been notable activists. In fact, SpringOwl’s Eric Jackson claimed he has sent YHOO a 99-page turnaround plan proposal.
Canyon Capital, on the other hand, along with Starboard, another Yahoo investor, are advising that the core assets of Yahoo stock — or even the entire company — should be sold. They’re arguing that Yahoo’s assets have deteriorated in value and that a lack of definite and effective action will only see the value of these assets deteriorate even further.
But selling Yahoo isn’t the best option.
Why Yahoo Shouldn’t Be Sold
I believe that those who are asking for Yahoo stock to be sold are underestimating the potential of Yahoo’s assets. As I argued in a previous Yahoo stock article, being one of the most trafficked sites in the world, Yahoo’s audience is larger enough to build something special. All that is needed is to have creative and flexible management that will harness Yahoo’s strengths to the fullest.
With the switch to mobile still in its relatively early days (I say that knowing that mobile will be the main source of revenue for most Internet companies in future), all hope is far from lost for Yahoo stock.
In addition, Yahoo stock has made some high-quality acquisitions in recent times that should help it do well in the mobile space. I’ll specifically point to its 2014 acquisition of Flurry – a mobile analytics company. Flurry is primarily set up to provide data to help mobile developers understand their audience better.
Flurry has been talked about as one of the best in the mobile analytics game. If so, then, with the right team in charge, Flurry can be a big driver of growth in the mobile space for Yahoo.
I want to point out here that I’m saying the right team is needed with Flurry because SpringOwl, in its 99-page turnaround plan, said that sources familiar with Yahoo stock said, “Flurry people are great at analytics but don’t understand how to monetize.”
So if YHOO stock is able to get the right team to properly monetize this asset, coupled with its already impressive audience base, the value of Yahoo stock will invariably increase in the long run. And that’s from just one acquisition.
What Yahoo Stock Needs Instead
For starters, Yahoo needs to focus on activities that will actually generate revenues from services rendered, instead of this entire BABA spinoff debacle, which is at best a plot to improve Yahoo’s market value, albeit falsely.
Yahoo has not been able to show how these spinoff attempts will actually be beneficial to investors. In the actual scheme of things, Yahoo doesn’t look diversified to the extent that it can’t focus on important business. The situation now only shows that Yahoo stock needs a management overhaul.
In addition to that, as SpringOwl argued, YHOO has too many employees. Since the reason businesses hire people is to grow the business, the revenue per employee metric is a good pointer. Over the past decade, Yahoo stock has seen its annualized revenue per employee drop from a high of about $625,000 to about $373,938.
That doesn’t speak well of the company’s talent-acquisition regime.
Bottom Line for YHOO Stock
Being a long-term-oriented investor, I don’t think giving Yahoo CEO Marissa Mayer one more year is too much in itself. However, the fact that nothing major has happened thus far during Mayer’s reign doesn’t give the confidence that it will be worth the wait.
With Mayer, uncertainties will persist. What this mean is that it’s discount days for value hunters, because if Yahoo isn’t sold, the fundamentals are still there to build YHOO into a really great company again.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
