Yahoo! Inc. (NASDAQ:YHOO) might be off to a slow start in 2015, but it’s still up a head-turning 29% in the past year and an even more shocking 226% over the last five years. This week, all eyes are on YHOO stock as the company is slated to report earnings tomorrow.
In terms of raw numbers, Yahoo earnings are expected to tally 29 cents per share versus 46 cents per share a year ago — a pretty steep 37% decline. That earnings estimate from Yahoo stock analysts is also 3 cents per share less than what was expected three months ago. On the revenue side, analysts are expecting a 1% drop to nearly $1.2 billion for the quarter.
But despite the earnings spotlight, those numbers aren’t what Yahoo stock fans are watching this week. Instead, the real question is what the company is going to do with regards to its stake in Chinese e-commerce star Alibaba Group Holding Ltd (NYSE:BABA), which burst onto the public market last year and has been helping shares of YHOO stock float higher for some time.
Right now, Yahoo owns around 384 million shares of BABA — the question is how it’s going to transfer that value to YHOO stock shareholders without getting slapped with taxes. And that’s the question CEO Marissa Mayer is expected to answer tomorrow.
Expectations are high for the announcement, with countless outlets quoting Mayer saying on the last Yahoo earnings call:
“We have the best tax experts in the country working intensively on structures to maximize the value to our shareholders of our remaining stake in Alibaba. Further, we are pleased with these efforts to date and are considering promising alternatives that we are optimistic would maximize value.”
In fact, Bernstein Research thinks that Yahoo stock could suffer if YHOO doesn’t deliver some good Alibaba news tomorrow. As analyst Carlos Kirjner put it in a recent report:
“Yahoo management has created a very clear consensus expectation for this coming earnings release, namely that they will announce that all the value currently locked in Yahoo!’s stake in the Alibaba Group will be transferred to Yahoo! shareholders with minimum tax leakage and overall costs. Anything short of this, and we believe investors will be disappointed and the stock will trade down significantly. Alibaba corresponds to such a large portion of YHOO’s value that this issue will likely swamp any results or management commentary about the core.”
Commentary about Yahoo’s core business has been secondary for some time, of course … a good thing considering the declining earnings we pointed to earlier. Kirjner also noted this in his research, writing: “For Yahoo core, the challenges are all too familiar — a combination of sluggish growth across business activities and compressing EBITDA margins.”
Then again, core numbers looked just fine (at least compared to expectations) last earning’s report — the company blew away analyst expectations posting earnings of 52 cents per share versus expectations of 30 cents per share.
Plus, the core without Alibaba could lure in buyers for the company — another thing Yahoo stock investors should keep an ear to the ground regarding. As Bloomberg’s Tara Lachapelle put it, “it would be much easier for a buyer to digest” without Asian assets like Alibaba. In fact, Lachapelle pointed to Alibaba, Tencent Holdings Ltd, SoftBank Corp and even Microsoft Corporation (NASDAQ:MSFT) as potential suitors.
All in all, Yahoo stock investors have a lot to think about this week. The good news is, despite all the uncertainty, analysts generally expect YHOO stock to keep marching at least mildly higher. Bernstein gives Yahoo stock a price target of $60, while even the median target of $53 is more than 8% higher than Friday’s close.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.
