Yahoo (YHOO) CEO Marissa Mayer hit headlines last week, when a New York University professor labeled Mayer the most overpaid CEO in history. This coincides with the IRS declining to rule on whether Yahoo could sell its stake in Alibaba (BABA) tax-free, as well as with the exit of two Yahoo executives — an indication of faulty management and a key contributor to a declining Yahoo stock.
Not to complicate things, we’re dealing with two issues here. First, is Marissa Mayer delivering value for Yahoo stock commensurate with what she’s paid?
Second, even if Mayer isn’t the rock star CEO Yahoo hoped for, is YHOO even worth an investment?
Let’s look at each issue.
The Main Problems With Yahoo Stock
Before Marissa Mayer took over Yahoo, revenues were already on a sharp decline. While her arrival had a halo effect, making Yahoo stock reach a ten-year high of over $50 a share, her management couldn’t stop the declining revenue. At best, she was only able to change it from a steep decline to a gentle decline — which means Yahoo’s core ad business is still shrinking.
Under Mayer, perhaps in a bid to be more digital-oriented and attractive, Yahoo redesigned its email interface, which is one of its biggest online assets. In the process, it took simplicity out of the picture. Many email users switched flags as a result, making Google’s (GOOG, GOOGL) Gmail the biggest email provider by active users in the world. I switched too.
On the positive side, Mayer seems to doing well in increasing Yahoo’s mobile base. Mayer said during the second-quarter earnings call that Yahoo now boasts a mobile user base of more than 600 million, which is a more than 300% increase from the 200 million monthly mobile users the company claimed when Marisa Mayer took over. Yahoo stock mobile base generated $252 million in revenue in the second quarter, a 55% increase year-over-year.
Still, the progress Yahoo is making under Mayer is quite slow. And the decision to spin off its stake in Alibaba isn’t an entirely smart move, as it reeks of an attempt to falsely improve the Yahoo stock price. And with the IRS declining Yahoo’s request for a tax-free spinoff, shareholders might not be appeased after all.
Moreover, it’s too early in the recovery process to think of spinning off. Its BABA stake is essentially what’s making Yahoo stock look so big. Spinning its BABA stake off without any solid growth elsewhere looks like blind swinging.
With that said, I believe that Yahoo’s position in the online world is undervalued.
That Doesn’t Mean YHOO Is a Bad Investment
We have to remember that Yahoo is one of the world’s most trafficked sites in the world. We also have to note that ad dollars have been moving away from traditional print media to the online space. Even though Yahoo is not at the top, it has already built an audience too large for advertisers to ignore.
As seen with its growth in the mobile space, Yahoo has the resources to improve significantly. Any venture it decides to embark on won’t be like a start-up gamble. The only thing missing is the right personnel for the job.
The fact that a company isn’t leading in a particular market doesn’t mean it isn’t a good investment. Google might be leading the online ad business, with Facebook (FB) right behind it, but the market is big enough that an established company like Yahoo is still able to garner respectable revenues. Even though we don’t hear it often, Yahoo is still among the leading online ad destinations.
Up until now, Marisa Mayer hasn’t done a rock star job at Yahoo. However, the gradual growth in the mobile space proves that the company has some assets that it has been underutilizing. I believe Yahoo stock is a buy for long-term oriented investors.
I would, however, wait until the spinoff drama ends in the fourth quarter before going in on Yahoo stock.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
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