It’s only a matter of time before Yahoo! Inc. (YHOO) splits off its core business and sells it to a struggling media company or perhaps a telco, and this reality actually gives YHOO stock some potential near-term upside.
It’s obvious that CEO Marissa Mayer has capitulated to the activist investors urging a breakup of the company. It’s also clear that the market likes where this is going.
Yahoo stock has gained more than 17% since the company with no identity announced massive layoffs on the core business side. YHOO is on track to lay off 1,500 employees, or 15% of its workforce.
As part of the initial round of blood-letting, YHOO also shuttered a wide swath of its websites.
Regrettably, the market always loves layoff. Employees are usually the leading cost in any business, so fewer workers means higher earnings.
The move in YHOO stock is a bit different this time. It’s supercharged because Yahoo isn’t cutting costs for their own sake. Rather, it’s prettying up an asset it intends to put on the market.
It’s also not a coincidence that Yahoo is doing some early spring cleaning with its accounting. The company said Monday that it may have to write off the remaining goodwill on its acquisition of Tumblr.
It’s up to the accountants to decide if Tumblr is an impaired asset, but one thing that’s not up for debate is that this was a horrendous deal. Mayer bragged about buying Tumblr for a billion dollars even when she knew she overpaid by $750 million.
YHOO Stock Has Almost No Appeal
No wonder investors want Mayer to sell the core business. She’s done enough damage as it is.
The right strategic buyer might be able to make something of Yahoo’s better sites. It’s strong in financial news, sports and politics. But it will still likely fail.
When it comes to consumers — especially Millennials — the Yahoo brand means nothing. It’s almost as embarrassing as AOL, now part of Verizon Communications Inc. (VZ).
True, YHOO has mountains of traffic, but ad prices are dropping all the time. Demographics are working against it too.
Rejuvenating a brand in any business is incredibly hard. The idea that a telco or a lumbering, old-line media company like Time Inc. (TIME) would know what to do with it is laughable.
The core business really has nothing going for it long-term. How much is anyone going to pay for that?
YHOO’s remaining assets — mainly its stake in Alibaba Group Holding Ltd (BABA) — are another matter. You can make a case for buying Yahoo here in order to get a piece of BABA post spin off.
You can also make a case for trading Yahoo stock right now. This deal for the core business is going to happen, and unless YHOO gets ripped off again, shares are going to do the routine short-lived pop.
If you want some BABA or enjoy active, short-term trading, YHOO stock makes sense.
For everyone else, growth’s over, folks.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
