Why Yahoo Stock Could Double
Hough: It's no Google or Facebook, but Yahoo may be too cheap to ignore.
By JACK HOUGH
Yahoo (YHOO: 15.43, -0.33, -2.09%) stock has lost half its value over the past seven years. It sells for just under $16 a share, a level it first hit in 1998, when "56k" dial-up modems were the hot new item for Internet users.
Just 29% of Wall Street analysts who cover the stock say to buy it, versus 54% for Facebook and 85% for Google.
But investors with an appetite for risk should nonetheless consider a purchase of Yahoo shares. The company has an good opportunity to double in value over the next three years.
Yahoo's stock market value stands now at $19.2 billion, but investors should think of it as a $4.7 billion company with $14.5 billion worth of cash and assets, says Colin Gillis, an analyst with New York broker BGC Financial.
Those assets consist of cash and stakes in Alibaba, a Chinese e-commerce group, and Yahoo Japan. Gillis says the Alibaba stake could fetch $14 billion and Yahoo Japan, $6.2 billion. After subtracting 40% for taxes, that works out to a total of $12.1 billion in cash. Add that to the $2.4 billion in cash Yahoo holds now, and the sum is $14.5 billion.
In other words, subtracting for the cash Yahoo stands likely to unlock, the operating company has a stock market value of $4.7 billion.
The company has already reached a deal to sell half its Alibaba stake by year's end. Talks are ongoing for a Yahoo Japan sale, and Mr. Gillis expects believes a deal could happen by next year. The last piece is the second half of the Alibaba sale, which could occur when Alibaba goes public, possibly as early as next year, says Mr. Gillis.
In its core business, Yahoo has long been struggling. For years, it has ceded market share to rivals like Google (GOOG: 607.57, -7.94, -1.29%) and Facebook (FB: 28.45, -0.30, -1.04%) in search and display advertising. Revenues last year slipped below their 2005 level.
Four years ago, Yahoo declined a $45 billion buyout offer from Microsoft. It has been through five chief executives in as many years. On Tuesday, it named Marissa Ann Mayer, a former Google search specialist, to the post.
Yahoo isn't exactly in freefall, however. Earlier this week it reported a fractional revenue increase, its second consecutive one after eight quarters of declines. It still has a massive online audience of 700 million visitors per month. Its number of unique visitors has been rising.
Management reiterated during the earnings call that the Alibaba deal is likely to close in mid-November and that the cash will be returned to stockholders. The company has a $5 billion share repurchase program in place. When companies repurchase their shares, it reduces the share count and raises earnings per share, the goal being to make remaining shares more valuable.
Yahoo is projected by Wall Street to generate over $900 million in free cash in each of the next three years. Calculated against its projected value of $4.7 billion net of its cash and assets, that would make for a free cash yield of 19%. The median free cash yield for companies in the Standard & Poor's 500-stock index is closer to 5%. If Yahoo were to close half that gap in coming years, its stock value would double.
None of this is to suggest that Yahoo is an easy turnaround project for Ms. Mayer. The company has floundered in search and been largely left out of rise of social networking. With its army of reporters and ad sales people, it also has a naturally higher cost structure than rivals. As Rolfe Winkler at The Wall Street Journal pointed out on Wednesday, Yahoo last year brought in just $316,000 per employee in revenues, versus $1 million for Google and $1.4 million for Facebook.
But investors who wonder how Yahoo can catch up to Google and Facebook may be missing the point. Yahoo is a midsize internet firm with outsized traffic and cash flow. It's deeply unpopular at just the time when its buried treasure is likely to be dug up and sold.
There are less risky tech investments, but daring contrarians should give this one a look.
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