Yahoo! Inc. (YHOO): Why The Stock Is Risky

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March 1, 2016 4:36pm ETF BASIC NEWS

wall-street-etfBob Ciura:  Everything is up for grabs now at Yahoo (NASDAQ:YHOO), the company has indicated. That means it’s willing to sell any or all parts of its business. However, shares are still at multi-year lows.


Yahoo stock

 

When we took a close look at Yahoo back in December, the stock wasn’t a buy. Now, with a new strategy, Yahoo stock is worth another look.

Yahoo stock has tumbled 40% in just the last year. Its core business continues to falter at the hands of Alphabet (NASDAQ: GOOGL) and other competitors. It has also seen its large stake in Alibaba (NASDAQ: BABA) work against it. Yahoo owns 15% of Alibaba, and as shares of Alibaba have fallen 30% in the last 12 months, it has pressured Yahoo shares.

Yahoo’s initial plan was to spin off its “valuable” Alibaba stake to unlock value for shareholders. That plan quickly went downhill when the company didn’t get a favorable ruling from the IRS regarding the tax implications of the spinoff.

Activist Pressure

Pressure from activist investors is nothing new for Yahoo. In the last 10 years, it’s faced pressure from Dan Loeb’s Third Point and Carl Icahn. Then there’s Starboard Value, which has been trying to induce Yahoo to unlock shareholder value for more than a year. That included trying to get the company to spinoff its Alibaba stake.

Then Yahoo decided it was going to spin off its core business, something Starboard opposed. Rather, Starboard wanted Yahoo to sell its core business and keep the overseas assets (i.e., Alibaba and Yahoo Japan).

The tech company had long been opposed to selling its core business. But that changed early this month when CEO Marissa Mayer said the company is open to doing anything it can to create value for shareholders.

Yahoo Buyout Ahead?

Yahoo has drawn interest from various parties, including private equity firms like Bain Capital. But the likely buyer is Verizon Communications (NYSE: VZ). You may recall that Verizon bought AOL for $4.4 billion last year.

Before that purchase, there was some speculation that Yahoo and AOL could merge. A Verizon acquisition of Yahoo would be a roundabout way to marry Yahoo and AOL. Yahoo still owns some valuable properties, including the sports and finance sites. Both of those operations  would be of interest to AOL. More importantly, it’s Yahoo’s user base that would be most enticing for both AOL and Verizon. Yahoo has over 1 billion users, which would fit nicely with AOL’s 2 million visitors.

Verizon Looks at Yahoo

Now, it appears that Verizon is taking an even closer look at Yahoo. Verizon has put AOL CEO Tim Armstrong in charge of exploring a possible bid for Yahoo.

Both Yahoo CEO Marissa Mayer and Tim Armstrong were executives at Google and have talked in the past about combining the two companies. Verizon, with the purchase of AOL, is hoping to build a mobile video business that can compete with the online ad winners – Google and Facebook (NASDAQ: FB).

Verizon would use Yahoo’s users and traffic as a jumping point to help grow its video streaming service and add value to Verizon’s 110 million wireless subscribers.

However, there are no formal talks and Verizon hasn’t hired banks to put together a deal.

Another Option

Meanwhile, another activist investor, SpringOwl Asset Management, has a bigger plan for Yahoo. This small fund is looking to turnaround Yahoo by getting it to fire 75% of employees and sell off assets.

The SpringOwl thesis is that breaking up the company now will only get shareholders a few extra dollars, but the turnaround would create much more value. The worry is that if they sold off assets now, it’d be a “fire sale” and they would be selling at depressed prices.

Yahoo Stock Is Risky

Still, waiting for a turnaround might take too long. Yahoo’s core business continues to deteriorate. Marissa Mayer has been trying to turn Yahoo around for years, ever since taking over the top spot in 2012. But that might be close to impossible. Yahoo has had seven CEOs since 2006 and has seen its market cap cut in half over this time.

And morale at the company appears to be dwindling. The company lost its senior VP in December, who was in charge of advertising products. It also lost its chief development and chief marketing officers last year.

In the end, things could get interesting, or they could get a lot more complicated. The company’s core business is in decline, which makes selling it as soon as possible appealing. However, Yahoo appears to be much more interested in turning around the business.

Turnarounds are hard, and with Yahoo stock trading at 43 times next year’s earnings estimates and 5 times sales, it’s not exactly all that cheap either. Until there’s a fundamental plan from Yahoo on how to separate out the overseas assets and monetize the core business, Yahoo stock is still too risky to own.

This article is brought to you courtesy of Bob Ciura from Wyatt Research.


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