Yahoo! (YHOO) soared as much as 12% last week before pulling back sharply again, fueled by rumors that the board is considering selling its core Internet businesses — including news, email and online search.
Yahoo management has yet to make any official announcements, but with a list of potential big-name buyers ranging from Comcast (CMCSA) to Verizon (VZ) to Disney (DIS), I wanted to take a frank look at where the company currently stands, as many are unsure whether Yahoo could be a valuable acquisition at all.
What’s YHOO Stock Worth?
If the phrase warns of “an elephant in the room,” YHOO stock presents us with the spectacle of a room full of elephants — the largest of which is the limited value of the core operation.
While U.S. and global web traffic are both still expanding, the audience throughout the company’s network of properties has hit a wall and is actually down 2.5% year-to-date. YHOO has lost 6 million net viewers since 2014, putting it below Facebook (FB) as No. 2 U.S. ad network overall.
That’s not a great trend.
Moreover, while new ad strategies have managed to squeeze about 10% more revenue out of that audience, it’s getting remarkably expensive to push the traffic to the sites. The company has outsourced a lot of the work of running an ad network — Google (GOOG, GOOGL) runs the search, and Mozilla is a primary referral source now — and pays a larger share of the overall revenue to the partners in exchange.
In some big cases (like Mozilla) YHOO has been paying out roughly every dollar in ad revenue that the partnerships generate: Mozilla brought in $94 million worth of eyeballs last quarter and received $94 million in return.
Not helping matters is the fact that desktop display advertising, YHOO’s original bread-and-butter, has been deteriorating for some time now. YHOO still claims nearly 80% of its revenue from desktop, but the core consumer channels are things like Tumblr, which is mostly kids on phones.
Outlook for Mobile
Mobile is often considered the Holy Grail pie in the sky, and YHOO brags a lot about how mobile traffic has surpassed desktop traffic as a share of its overall audience mix. But while the company is monetizing that side of the audience better now, it’s going to take a long time before it actually pulls its weight. Mobile is now the vast majority of the company’s top-line growth (85 cents out of every new dollar YHOO stock took in last quarter), but we need to see a lot more action here for mobile to reach revenue parity.
As we try and wedge more and more elephants in the room, it becomes gradually clear that YHOO is not a robust business. Earnings per share have actually collapsed 62% over the last year even though net ad revenue is theoretically up — that’s the cost of traffic acquisition biting them again. Nobody on Wall Street really expects more than 10%-15% growth from here, which means the old multiples are not coming back for a really long time.
The story only looks grimmer when you delve into how much YHOO is actually worth.
The company has a market value of $32.8 billion, but when you factor in its holdings in Alibaba Group Holding (BABA) — worth around $32.2 billion — you’re not left with much in implied market capitalization.
Plus, the company also has a $8.8 billion stake in Yahoo Japan, pushing its value into the negatives. The sheer weight of these combined holdings masked the fact that this once dot-com giant’s Wall Street footprint has shrunk to barely start-up scale.
So, whoever takes the bait and buys in (if anyone does) will have to tread carefully. YHOO is looking a lot like a leaky ship that’s already halfway underwater, and it’s going to take more than a change in leadership to plug the holes in its hull.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
