When Marissa Mayer took the helm of Yahoo! Inc. (YHOO) in July, 2012, there was much fanfare and optimism. It seemed that the company was poised for fundamental change and that growth would rev up again.
However, fast forward to today and most of the enthusiasm has turned to downright gloom and doom. In fact, it’s really tough to find anyone who likes Yahoo stock!
But for investors, this can be a good thing. If anything, Yahoo stock is extremely cheap — and the value could be soon unlocked with a buyout.
Now regardless of the mixed results from Mayer, she still made some good moves. After all, there were cuts in the operating expenses as the headcount dropped by about 34% since 2012 and there are plans for another 15% cut. At the same time, Mayer has been aggressive with pruning the product portfolio, such as getting rid of Smart TV and Yahoo! Games.
Of course, she has also invested heavily in bolstering mobile, which is certainly key for Yahoo stock. This is all part of her so-called Mavens strategy (which stands for mobile, video, native and social), which generated $1.6 billion in revenues in 2015, up about 45%.
The Down Side of Yahoo!
The problem? Well, of course, there has been a brain drain at YHOO, with top people like Prashant Fuloria (who was part of the mobile business), Jackie Reses (the head of acquisitions) and Kathy Savitt (a leader on the video side) departing. According to Glassdoor, only about 34% of the employees think that the company is getting better.
Then there are the secular headwinds. In other words, there has been a deterioration in legacy businesses like banner ads and desktop search. This is probably why YHOO has suffered from reductions in the user numbers for key properties like Yahoo Mail, the Yahoo.com home page and Yahoo Search (this is according to a recent post from The Information).
And of course, the company must deal with the intense competition. The fact is that the mega operators, such as Facebook Inc (FB) and Alphabet (GOOG, GOOGL), continue to get the lion share of the mobile and video opportunity.
So Why YHOO Stock?
When it comes to Yahoo stock, it’s really a classic case where the sum of its parts is worth more than the market cap. The Alibaba Group Holding Ltd (BABA) stake is worth about $25 billion, Yahoo Japan is at about $9 billion and the core Yahoo business should be able to fetch least $5 billion.
There is also about $7 billion in the bank.
Adding these up gets to about $46 billion, yet the market cap is $28 billion!
Now it’s true that this could be reduced because of a tax hit. But interestingly enough, this may ultimately be good for shareholders. The reason is that this grim prospect could compel YHOO to sell to a larger operating company, such as Verizon Communications Inc. (VZ). By doing this, the tax situation may actually be fairly minimal (this is according to tax whiz Robert Willens).
While YHOO has its many issues, there are still strong assets that should help another company get a foothold in the digital space. For example, the company has more than 1 billion monthly visitors and over 600 million are mobile. There are also fast-growing properties like Tumblr, as well as franchise sites like Yahoo Finance.
According to SunTrust Robinson Humphrey analyst Robert S. Peck, there are more than 20 bidders that have expressed interest in making a play for Yahoo stock.
In other words, this could allow for a nice premium bid. After all, this happened with AOL, when VZ paid $4.4 billion for the company in May 2015.
And yes, the board of YHOO is certainly feeling the pressure as it has announced the formation of a special committee and hired Goldman Sachs Group Inc (GS), JPMorgan Chase & Co. (JPM) and PJT Partners to explore “strategic alternatives.” Often this is a prelude to a sale.
Again, there is much urgency for this. The transition to mobile has been tough because of the competitive forces, there has been deterioration in the legacy assets and of course, shareholders are extremely frustrated.
All in all, for investors looking for an interesting play, there may finally be a catalyst to unlock the value of Yahoo stock.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
