Yahoo! Inc. (YHOO) $16.11
The Company:
Founded by Jerry Yang and David Filo in January 1994, Yahoo! was once the most visited website in the world. The word “yahoo” is an acronym for “Yet Another Hierarchical Officious Oracle”, referring to the site’s aggregation and search roots. In an ironic twist of fate, Yahoo! tried to buy Excite for $5.5 billion to $6 billion in the late 90s, but Excite instead agreed to get acquired by @Home Networks. Excite turned down an offer to buy Google for $1 million and then a revised $750,000 in 1999. Excite eventually went bankrupt, Google has a market cap of $207 billion and Yahoo! is worth one-tenth Google’s market valuation.
Yahoo! has stumbled along for the last several years with several CEOs at the helm, several product disappointments, an exodus of talent to other Silicon Valley firms and a reputation for acquiring promising companies and then stifling them (online bookmarking site del.icio.us is a good example). The company saw its stock lose more than two-thirds of its value after it turned down Microsoft’s offer to acquire the company for $33 per share in 2008. I picked up a position in the company following acquisition rumors last Fall and the involvement of activist hedge fund manager Dan Loeb. I held on to the stock until earlier this month and sold it shortly before the announcement of Marissa Mayer as the new CEO of Yahoo!.
Dan Loeb waged a proxy battle with Yahoo! to get himself and a slate of three additional directors appointed to Yahoo’s board of directors and to replace CEO Scott Thompson. Mr. Loeb even launched an interesting website called Value Yahoo! making his case for why Yahoo! needed a change of leadership and direction. That site has since been taken down and Mr. Loeb is now one of Yahoo!’s directors.
There are four reasons Yahoo! looks interesting right now besides the recent insider purchases by Mr. Loeb through his fund Third Point and purchases by one of his nominees, Michael Wolf.
i) The value of Yahoo’s asian assets, including a 40% stake in Chinese internet company Alibaba and a 33% stake in Yahoo! Japan.
ii) Unlocking of shareholder value through the involvement of Mr. Loeb and a deal to sell half its stake in Alibaba back to the Alibaba Group for $7.1 billion. Yahoo! plans to return most of that money to shareholders through share buybacks and other yet to be revealed avenues. The company has repurchased $4 billion worth of shares since 2009 at an average price of $14.81 including $450 million in the second quarter of 2012.
iii) The appointment of Marissa Mayer as their new CEO. We will get into this later.
iv) A company that has a cash rich balance sheet with $1.9 billion in cash and that generates more than $1 billion in operating cash flow. Yahoo! properties are still the fourth most visited in the world and include several top properties like Yahoo! Finance (the source for most of our financial data) and Yahoo! Sports.
After a string of misfit CEOs, the company has finally recruited what appears to be the right CEO for the company. What the company desperately needs is a focus on products and Ms. Mayer’s extensive product experience at Google will hopefully bring that focus to Yahoo. Products, like companies and entrepreneurs, suffer from survivorship bias where we only talk about the successful ones and the vast majority of unsuccessful products barely merit a mention. Can a single successful product help turn around a company the size of Yahoo?
Consider for a moment that cloud-sharing phenomenon DropBox raised its last round of financing at an estimated valuation of $5 billion to $10 billion. Cloud-based file sharing is not a new phenomenon (remember XDrive with its 5 GB of free storage?) and search was considered a mature space by the time Google rolled along. The difference is building an extremely user-friendly product with a simple interface that does its job well. There is always a chance Yahoo! might incubate the next DropBox and with Ms. Mayer at the helm, the odds appear to now be in their favor.
An investment thesis that rests primarily on the potential of new products that might be successful would not be a very strong one. The value of Yahoo! lies both in its new leadership as well as its current assets. Alibaba Group agreed to acquire half its stake for $7.1 billion with an option to acquire 10% more. Essentially this puts Yahoo!’s Alibaba stake at $14.2 billion (before taxes, as the transaction is taxable to Yahoo!). Yahoo! Japan is a publicly traded company that last traded for 28,600 Yen or $365.87 per share with a market cap of nearly $21 billion. Yahoo!’s 33% stake is hence worth nearly $7 billion. Just these two assets put together are worth more than Yahoo!’s current enterprise value of $17.9 billion and you get their operating business almost for free. Unfortunately assuming a 35% tax rate, Yahoo! could at most get about $14 billion for both Alibaba and Yahoo! Japan if they sell their entire stake.
Business Statistics & Financials:
Yahoo reported $228 millionin operating income with 21% operating margins and single digit revenue growth in Q2 2012 before restructuring and expenses related to the sale of Alibaba. The company trades for nearly four times is 2011 revenue of $5 billion and 13.4 times EBITDA. Based on those metrics the stock does not appear to be cheap until you consider its Asian assets discussed above.
Competitors:
Stock | Symbol | Mkt Cap | EV/EBIDTA | P/B | Operating Margin |
Microsoft Corporation | MSFT | 249.38B | 6.3 | 3.68 | 37.92% |
Google Inc. | GOOG | 206.45B | 10.72 | 3.09 | 30.48% |
Facebook, Inc. | FB | 50.68B | 25.44 | 9.09 | 43.31% |
Yahoo! Inc. | YHOO | 19.68B | 13.41 | 1.55 | 15.91% |
AOL Inc. | AOL | 2.96B | 3.57 | 0.93 | 11.13% |
Insider Buying:
Five insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Yahoo! Inc. here.
Owner | Relationship | Date | Cost | # Shares | Value($) | Total Shares |
Alfred J. Amoroso | Director | May-22 | $15.43 | 10,000 | 154,300 | 16,075 |
TOTAL | 10,000 | 154,300 | ||||
Daniel S. Loeb | Director | Jul-23 | $15.67 | 804,000 | 12,598,680 | 73,000,400 |
Daniel S. Loeb | Director | Jul-20 | $15.82 | 1,696,000 | 26,830,719 | 72,196,400 |
Daniel S. Loeb | Director | May-31 | $15.24 | 1,712,400 | 26,096,976 | 70,500,400 |
TOTAL | 4,212,400 | 65,526,375 | ||||
Maynard G. Webb Jr | Director | May-25 | $15.39 | 5,000 | 76,933 | 5,000 |
TOTAL | 5,000 | 76,933 | ||||
James Harry Wilson | Director | May-31 | $15.15 | 25,000 | 378,750 | 51,498 |
TOTAL | 25,000 | 378,750 | ||||
Michael J. Wolf | Director | Jul-23 | $15.66 | 4,000 | 62,658 | 59,519 |
Michael J. Wolf | Director | Jul-20 | $15.87 | 20,000 | 317,372 | 55,519 |
TOTAL | 24,000 | 380,030 |
Conclusion:
It takes time to turn a ship of Yahoo!’s size around, especially one that has such low employee morale in an environment where good talent is hard to find in Silicon Valley. A number of near-term events such as the sale of their Alibaba stake and the hiring of Marissa Mayer have already come to pass. Future events such as a potential special dividend and additional asset sales might buoy the stock up temporary but I don’t expect the stock to double in short order. While the stock has an attractive valuation, it looks like the Yahoo! story is going to take some time to unfold.