Yahoo! Inc. (YHOO) stock is well off its multi-year lows, rallying nearly 12% over the last month. Some might think that now is the time to buy YHOO, especially given the obscene value in its sum of parts. However, it’s not that easy, and more than likely, Yahoo stock is going to be in for a long year.
As explained in a previous article, YHOO has about $55 billion worth of assets squeezed into the company’s $30 billion market capitalization. And given Alibaba Group Holding Ltd’s (BABA) value appreciation in recent weeks, coupled with the latest developments regarding Yahoo’s intellectual property and non-core asset value, its sum of parts might be closer to $60 billion.
As a result, investors demand that this value be realized.
The only way to do so is with spinoffs, divestments or even buybacks. Nevertheless, one would certainly think that Yahoo stock is a must buy — a stock that will soon appreciate and is worth owning due to this sum of part value.
It’s not that simple for YHOO
Unfortunately, the problem surrounding Yahoo stock, and the company as a whole, is a lack of leadership, conviction and trust among investors.
Back in February, YHOO announced that it had formed an independent committee to explore strategic alternatives. On the surface, this looks like great news, implying that YHOO will unlock value sooner than later.
However, the news was met with a fair amount of skepticism.
Investors realized that Yahoo has been down this road before with nothing to show for it. It has been about two years since YHOO formed an independent committee to determine the best course of action for unlocking the value in its 384 million share stake in BABA. Yahoo decided to divest the asset, and despite resistance from the IRS, the company insisted that it would push forward with this planned spinoff all the way until late last year, just months prior to its fruition.
While YHOO could have been liable for $9 billion in taxes from the spinoff, I — along with many others — suggested that management should continue with the plan. At this point, YHOO had already spent the millions — if not 100’s of millions — in preparation of the expected spinoff. More importantly, YHOO could have fought the IRS for many years in court on the tax bill by looking at any number of previous spinoffs where companies were not held responsible for taxes.
Instead, YHOO backed out at the last moment, and now here we are, going through the same exact process once more.
No reason to trust YHOO
In other words, Yahoo management set investors back by at least two years by being fickle, and for this reason, activist investor Starboard is threatening a proxy battle if the company does not give up control of its board. Starboard is essentially citing incompetence and diminished shareholder value as the reason for its demand — two claims that not many can dispute.
Nonetheless, Yahoo stock looks like a great investment to the naked eye, but when you dig deeper and look at the whole story, there is absolutely no reason to have faith that management will divest the assets in a timely manner. Furthermore, there is no reason to believe that management will move forward with whatever it decides.
Most importantly, there is no end in sight to this carousel ride.
Therefore, it may sound good that Yahoo has hired an independent committee, and that Yahoo is exploring a spinoff of its core assets, a sale of its non-core assets and that Verizon is reportedly a willing buyer. However, investors don’t take Yahoo’s management or board seriously, and have no faith that these individuals can get something done in a reasonable amount of time. For that reason, Yahoo stock is likely to remain pressured, not realizing any of the company’s assets, even once a “plan” is announced.
At the end of the day, don’t expect Yahoo stock to realize any upside value until an asset sale or spinoff is complete, at which point it will then be wise to invest in YHOO.
Until then, take everything with a grain of salt — even Yahoo stock’s most recent gains.
As of this writing, Brian Nichols does not own any of the aforementioned securities.
