For better or worse, the market wasn’t entirely surprised struggling web company Yahoo! Inc. (NASDAQ:YHOO) delivered less-than-thrilling second-quarter numbers. Indeed, the lack of action — bullish or bearish — from YHOO stock since Monday’s post-close report in some regards suggests the results at this point are meaningless.
The company is going to be under new ownership and management in the near future anyway, and that new leadership is (hopefully) going to be doing something quite different from what’s being done now.
Only time will really tell if it works.
Yet — if for no other reason than morbid curiosity — the latest batch of deteriorating numbers is worth exploring to justify the Yahoo sale that still didn’t happen soon enough.
Yahoo Earnings
Whether Yahoo’s second quarter report was good or bad is largely a matter of perspective. Most investors, however, are seeing the glass as half-empty.
The only real victory with Q2’s numbers was the unadjusted top line of $1.3 billion. That was up from the year-earlier revenue figure of $1.24 billion. But don’t be misled.
When stripping out traffic acquisition costs, which gives a more accurate indication of the company’s health, revenue fell from $1.04 billion to $841 million. The figure topped estimates of $840 million, but such a beat is a dubious honor.
As for earnings, there was no victory on that front, perhaps other than to note Yahoo is at least still capable of turning a profit … shrinking though it may be. The company earned an operating profit of 9 cents per share of YHOO stock last quarter, missing estimates of 10 cents per share, and coming up well short of last year’s bottom line of 16 cents per share.
On a GAAP basis though, Yahoo posted a sizeable loss of $440 million, thanks to a goodwill write-down of $395 million, and another write-down of $87 million stemming from what can now only be called a worthless $1.1 billion acquisition of Tumblr in 2013.
CEO Marissa Mayer commented on the numbers:
“With the lowest cost structure and headcount in a decade, we continue to make solid progress against our 2016 plan. Through disciplined expense management and focused execution, we delivered Q2 results that met guidance across the board and in some areas exceeded it. In addition to our efforts to improve the operating business, our board has made great progress on strategic alternatives. We are relentlessly focused on delivering shareholder value.”
Yahoo is now into its fourth year of deteriorating net profits, and it has been more than two years since quarterly gross profits grew on a year-over-year basis.
Mum’s the Word on Yahoo Sale
As was noted, the numbers at this point are largely secondary to the impending acquisition of the company, which began soliciting bids in April once Mayer and the Board of Directors accepted the reality there was no other choice. Mayer’s only meaningful comment on the matter yesterday was “While we have no announcement today, we are deep into the process of evaluating proposals and alternatives and will update our shareholders as soon as prudent.”
That hasn’t prevented expert observers from chiming in on the matter, however. MarketWatch‘s Therese Poletti, for instance, has opined that Mayer will be looking for a new job at the end of the sale process no matter who buys the company and when. Poletti is not alone in that regard.
Yet, Mayer may well have been right on target in explaining the reason for weakening revenue is the impending sale of the organization itself; advertisers don’t know what they’ll be getting once new management starts to work on a turnaround.
In that light, YHOO stock may offer more upside than it’s currently getting credit for.
Verizon Communications Inc. (NYSE:VZ) remains the presumed high bidder, though private equity outfit TPG and another group led by Dan Gilbert, of Quicken Loans, are said to be in the running. The final bids were due yesterday.
Bottom Line for YHOO Stock
Calling a spade a spade, the numbers — and their trend — are scary. Any suitor that ends up acquiring Yahoo certainly has its work cut out for it. But, it’s possible the bulk of any past and future downside is already priced into the value of Yahoo stock.
Of course, that doesn’t necessarily mean a whole lot to investors right now. Whichever buyer ends up making the best bid will likely either absorb or privatize the company, thus ending YHOO stock.
Would-be buyers might scrape off a bit of a profit between the stock’s current price and whatever premium a suitor offers. There may not be much of a premium, however, as all the buyers have to know at this point that Yahoo needs them more than they need Yahoo.
That’s the long way of saying stepping into YHOO stock now is little more than speculation, with most of that being on the future of its Alibaba Group Holding Ltd (NYSE:BABA) stake. Yahoo’s web operation as an investment is already history.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
