Yahoo! Inc.: Is Yahoo Stock (YHOO) Worth the Risk?

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Yahoo! Inc. (YHOO) has had a rough ride over the past year as the company’s core Internet business failed to protect its market share and bigger, better tech firms took over.

Yahoo! Inc.: Is Yahoo Stock (YHOO) Worth the Risk?The company appears to be planning a reverse spinoff, in which Yahoo’s Internet business (including its search and mail service) will be sold to the highest bidder.

While this presents an interesting opportunity for investors, the question remains as to whether or not there will be any bidders at all.

A Spinoff Could Drive YHOO Stock Holder Value

Yahoo stock lost a considerable amount of value throughout 2015, and the Yahoo stock price has fallen another 18% so far this year.

The fact that the once-great Internet company’s stock is trading below $30 has given some investors reason to believe that now is the time to buy to take full advantage of a spinoff later in the year.

While there is an opportunity there, you have to really believe that a breakup is happening and that all of the pieces are going to fall into place when it does.

In theory, YHOO stock is a great buy because when the company eventually spins off its Internet and Yahoo Japan businesses, shareholders will reap the rewards.

That would effectively make Yahoo a holding company with a sizable stake in Alibaba (BABA). It remains unclear, however, how YHOO will divide, what the tax implications would be and whether or not anyone is actually interested in buying what Yahoo is selling at a decent price.

How Much Is Yahoo Really Worth?

While Verizon (VZ) has expressed some interest in buying Yahoo’s Internet business, the telecom giant hasn’t given any indication of what it would pay.

Analysts say Yahoo’s core business is worth between $2 and $4 billion — only four to five times EBITDA. Many wonder whether or not Yahoo would be willing to sell for such a low offer, and there’s no guarantee that anyone will be chomping at the bit to pay that price either.

Then there’s the company’s Yahoo Japan stake, which would probably go up for sale alongside the Internet business. Back in April 2015, that stake was valued at nearly $9 billion when the company announced that it was considering a sale.

Interest in Yahoo Japan has been muted, however, with no buyers coming forward over the past ten months since the announcement was made.

But even if there are buyers out there who are willing to pay top dollar, there are several other concerns that make YHOO a risky play.

Good Things (Usually) Come to Those Who Wait

For the past year, Yahoo! Inc. has been working out ways to drive shareholder value. That process has stalled time and time again as Yahoo management changed its mind, coming up with new plans.

Yahoo has circled through everything from plotting to reinvigorate its core business to selling its Alibaba stake over the past year, only to begin 2016 by announcing plans for a reverse spinoff.

This indecision is troubling precisely because it signals to investors hoping for a sale that they could be in for a long, long wait.

Not only is Yahoo likely to hold out for what it sees as a reasonable valuation before agreeing to accept an offer, the company could also take its time putting the business up for sale.

The problem with this approach is that Yahoo isn’t getting any younger; rival firms have already stolen much of Yahoo’s former glory and the company is becoming less valuable with each passing moment.

The Marissa Mayer Effect

Another consideration for investors looking to profit from a reverse spinoff is CEO Marissa Mayer.

Her tenure at Yahoo has been rocky to say the least, and her management skills have been questionable. Mayer has spent billions on acquisitions that did very little to enhance YHOO’s value and she has contributed to the firm’s bloated operating expenses by treating her employees to lavish holiday parties and brand new iPhones.

Rightfully so, some worry that excess cash generated by a sale would be mismanaged by Mayer and may not make its way into shareholders’ pockets.

The question of whether or not to buy Yahoo ultimately depends how much risk you can stomach.

There is a good chance that buying YHOO at its current price will pay off in the long term, as it’s likely we will see an upside later in the year — especially when news breaks regarding the firm’s spinoff plans.

However, buying Yahoo stock in hopes of a breakup that will deliver gains to shareholders is certainly a risk considering the company’s track record and poor valuation.

That said, this year’s market looks to be a turbulent one, so investors looking for impressive returns will probably have to make some big plays, and YHOO stock could be one of them.

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

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Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/yhoo-yahoo-stock-marissa-mayer/.

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