How Can Yahoo (YHOO) Turn Its Stock Around?

Yahoo (YHOO) has been on a steady decline ever since the Alibaba (BABA) initial public offering. To recap, investors were very optimistic for Yahoo in the coming months prior to the Alibaba IPO. Alibaba then recorded a record $25 billion IPO, the largest in history and Yahoo had sold 122 million shares and received an after-tax inflow of $5.1 billion.

Yahoo is currently trading at $37.56 per share, down about .70% for the day. But in the past 5 days and month, Yahoo has returned, respectively, -8.18% and -11.45%. But in the last three months, Yahoo is still up 11.93% which could be attributed to investor optimism from the Alibaba IPO.



After the BABA IPO, Investors pressured Yahoo CEO Marissa Mayer to use the extra cash to grow Yahoo’s main core business of being an advertisement platform. Jeffrey Smith’s activist investor of Starboard value then sent a letter to Yahoo proposing a strategy to unlock value for Yahoo’s shareholders.

Yahoo’s Temporary Fix

It has been a rough couple of weeks for Yahoo and the company is actively looking to turn things around by issuing either dividends or buying back shares, and the company has already promised to return half of the cash proceeds that it received by selling its stake in Alibaba to shareholders. Still, Yahoo has a number of options to deploy the remaining cash.

This strategy by Yahoo will temporarily ease investors in the short-run, but investors are seeking long-term growth. Also, Yahoo is almost finished in closing a $20 million investment in Snapchat at a valuation of $10 billion. Again, this is another strategy for Yahoo that does not focus on core business growth, and does little to invest their massive cash stockpile.

Yahoo’s True Value

What is important for investors is to seek out the true underlying value of a business, especially in Yahoo’s example. Yahoo at the core is a search engine generates cash by being a main advertising platform to generate revenue.

Yahoo made a great investment in Alibaba, but seems to be switching focus on investments and acquisitions in order to drive growth rather than improving their fundamental business. Yahoo has a current market capitalization of about $37.34 billion which for this example can be divided among the following: Alibaba stake, Yahoo Japan Stake, cash & debt, and finally core business value.

If we look at the table below, after accounting for the prelisted holdings and assets, Yahoo’s core business value can be valued around $ 4 billion. If we look on the bright side, if Yahoo decides to split apart into different business, Yahoo’s core business will be extremely cheap.



Activist investors have already been pushing Yahoo to create a strategy that will generate real value for investors and if the stock price drops any more, I feel that activist will come and push even harder.

Bottom Line

We currently rank Yahoo as a Zacks Rank #3 (hold), and have beaten earnings estimates by an average surprise of 12.38% in the past year. The current consensus estimate for the quarter is projected to be 20 cents per share and 99 cents for the current year.

Next week, Yahoo will be having a live streaming of their Q3 earnings on Tuesday at 4PM (CST) and should be hearing questions about strategies on focusing and growing their core business again. Investors should be listening in to see if there are any key strategies or components that will be said in the conference call that will point Yahoo in the right direction, and help pull the stock out of its post-BABA IPO hangover.

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