Yahoo (NASDAQ:YHOO) CEO Carol Bartz might have avoided dropping any of her trademarked F-bombs during her post-earnings conference call Tuesday afternoon, but the same probably can’t be said for the company’s investors. Yahoo frustrated its shareholders yet again, missing analysts’ second-quarter earnings estimates and lowering its guidance for the full year.
The primary culprit was a weak showing in display advertising, particularly in North America, where the company’s Q2 revenue of $524 million fell well short of the expected $568 million. Bartz cited a restructuring of Yahoo’s sales force – and the heavier-than-expected turnover that resulted – as the main cause of the poor showing, and she expressed confidence that display-ad revenues would get back on track once the restructuring process ran its course. But judging from the 7% decline in Yahoo’s stock price Wednesday, few investors share Bartz’s positive outlook.
With Yahoo shares plumbing the low teens, is the stock a buy? A number of analysts seem to think it is, with many keeping their price targets in the $18-$20 range, even in the wake of Tuesday’s disappointment. The most frequently cited case for Yahoo is the sum-of-the-parts analysis, which places the total value of Yahoo in the high teens if the company were to be broken up. This analysis accounts for Yahoo’s U.S. search business and the value of its stakes in Yahoo Japan and the Chinese e-commerce giant Alibaba Group.
At this stage, however, estimates of the company’s underlying value are doing little to move the stock. The conference call contained little color regarding Yahoo’s efforts to monetize its ownership position in Yahoo! Japan, while the value of the Alibaba stake has been muddled by the spin-off of its position in the payment service Alipay – a move that caught both Yahoo’s management and its investors by surprise. Yahoo is pursuing efforts to make sure Alibaba is adequately compensated for the sale, but it could take until 2012 for this issue to be fully resolved.
Investors therefore have little left to hang their hats on, other than the likelihood of a short-term, dead-cat bounce from deeply oversold technical levels. Even at its current price near $13, Yahoo still is trading at 12.5 times 2012 estimates even when its net cash of $2.14 per share is factored in – not a particularly compelling valuation for a company whose core business appears to be a wasting asset. Perhaps a long-term investor can benefit from a breakup – eventually. But Bartz’s track record to date leaves doubt as to whether this can be executed quickly and effectively enough to make an investment in Yahoo worthwhile, even at this level.
Bartz wrapped up the final portion of the earnings call by saying, “In conclusion, we made substantial progress transforming Yahoo … but we’d like to be farther down the road than we are.”
It seems investors couldn’t agree more.
Daniel Putnam did not own any of the aforementioned stocks as of this writing.
