Yahoo (YHOO) stock rallied after posting surprisingly strong quarterly earnings for the first time in ages, but before anyone gets carried away, let’s acknowledge the fact that — at best — business at YHOO is only getting less worse.
True, Yahoo stock is within striking distance of a 52-week high and back at levels last seen in 2005. YHOO stock may be flat for the year-to-date, lagging the S&P 500 by 5 percentage point, but it’s clobbering the market over the last one-, three- and five-year periods.
And, yes, Yahoo showed Wall Street and its antagonistic activist investors that it really can improve its core business.
It all comes down to Alibaba (BABA). Yahoo holds a stake in Alibaba worth about $35 billion, and what it does with that asset has far greater implications for the stock price than anything it else YHOO does. After all, too many traders and investors wouldn’t go anywhere near Yahoo stock were it not for Alibaba.
More damning, third-quarter results were much improved, but then, we’re talking about clearing a very low bar here. Sales rose for only the second time since 2012, at that’s being touted as a victory.
To give YHOO its due, earnings rose to $6.8 billion, or $6.70 a share, from $297 million, or 28 cents a share, last year. After excluding the $6.3 billion after taxes that YHOO booked for selling part of its stake in the Alibaba IPO and other items, earnings came to 34 cents a share. That topped analysts’ average estimate by 2 cents a share, according to a survey by FactSet.
Revenue excluding traffic acquisition costs, meanwhile, rose 1% to $1.09 billion, which was also ahead of analysts estimates.
Yahoo Stock Trades on Alibaba, Buybacks
This wasn’t yet another quarter of continued deterioration in Yahoo’s core business, and that’s a nice change. The big picture, however, still shows how far YHOO has to go.
Traction in mobile is nice — mobile users grew 17% to account for more than $200 million in revenues — but also kind of laughable compared to Google (GOOG) or Facebook (FB), which derive more than half their total revenues from mobile.
Worse is that YHOO continues to lose digital ad market share to GOOG and FB. Indeed, YHOO is lagging so badly, it can’t even claim a decent piece of a rapidly growing pie.
As RBC Capital Markets analyst Mark Mahaney told The New York Times:
“Things might be getting less worse. What people are really going to want to see is evidence that they are growing in line with the market.”
Yahoo is attractive because of its remaining stake in Alibaba and its generosity with cash. CEO Marissa Mayer has told analysts repeatedly that YHOO bought back $7.7 billion in its own shares during her tenure, while spending just $1.6 billion on acquisitions.
Fortunately for anyone holding YHOO stock, the Alibaba stake and stock buybacks mean you should hold on. Sanford Bernstein analyst Carlos Kirjner believes YHOO has upside of more than 30% in the near term because management will be free to disclose what it wants to do with its Alibaba stake early next year.
With an activist investor nipping at its heels and with Yahoo boasting at least stable search and display revenue, YHOO is a hold and maybe even a buy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.