Friday, January 20th, 2012
By Sasha Cekerevac, BA for Profit Confidential
Long-term investors in Yahoo! Inc. (NASDAQ/YHOO) are not shedding a tear for founder Jerry Yang on the news that he has resigned from the Board of Directors and all other positions with the firm. They bitterly remember the news on February 1, 2008, that Microsoft Corporation (NASDAQ/MSFT) had announced an offer to buy Yahoo! for $31.00 a share, valuing the company at $44.6 billion, which Yahoo! later rejected. Since then, shares of Yahoo! have never come close to the offer price.
At the time, it was discussed extensively that Yang was the hold-out against Microsoft’s offer. In the area of Internet-related stocks, Yang thought Yahoo! could go it alone and succeed. He was wrong. But since he’s now gone, does this represent a buying opportunity in Yahoo! or one of the other Internet-related stocks?
Let’s take a look at some recent developments in Yahoo!, what the company’s pieces are worth, and what the most likely scenario will be. Yahoo! has recently added a new CEO, Scott Thompson, who was formerly the president of PayPal, part of eBay Inc. (NASDAQ/EBAY). He has extensive knowledge of online payment systems and international development. Although he does not have direct experience with search and advertising, he does have knowledge of Internet-related stocks working with a firm that is a global leader in payment processing.
But as good as Thompson is as an executive, he might not be able to generate enough of an increase in revenue to justify Yahoo! as a buying opportunity. Don’t forget; prior to Thompson, the Board brought in Carol Bartz, former CEO of Autodesk, Inc. (NASDAQ/ADSK). She ran a very successful firm, but also was not directly involved in Internet search and online advertising. Her reign was definitely not a buying opportunity.
The pieces of Yahoo! are very interesting. Yahoo! has a 40% stake in Alibaba Group Holding Ltd. and a 35% stake in Yahoo! Japan. These are very valuable entities. Some estimates have these as a buying opportunity, valued together in the $18.0-billion range. The current market value of Yahoo! itself is $20.0 billion, which includes these pieces and $2.0 billion in cash on hand.
At a $20.0-billion value for Yahoo!, the core business is valued at zero. While it’s not a top-notch Internet firm like Google Inc. (NASDAQ/GOOG), there is some value in having 700 hundred million users. A firm like Microsoft might want to buy some of the pieces, especially Yahoo! Japan. Microsoft search engines have a market share in Japan of approximately 1.7%, compared to over 51% for Yahoo! Japan. Microsoft has a ton of cash on hand and needs to find growth somewhere. Adding Yahoo! Japan might be a great fit and a current buying opportunity. Even the U.S. share of searches for Yahoo!, approximately 14.9%, would be a nice addition to Microsoft’s search engine market share of six percent.
The Yahoo! stake in Alibaba is thought to be sought by the parent company itself. Rumors have been swirling that Alibaba might buy Yahoo! outright. One thought to consider: Thompson the CEO of Yahoo, comes from PayPal. Online payment processing is his specialty, not web search. Perhaps he will work to combine his skills with a partnership between Yahoo! and Alibaba. Alibaba is a global Web-based firm that provides a business-to-business marketplace.
No matter how you slice it, Internet-related stocks will be sure to have some sort of shake-up within the next year. It’s very hard to predict the future of any industry, but if you thought that Yahoo! might sell off pieces or itself as a whole, then I would step in and see this as a buying opportunity. Until then, I would be cautious, as Yahoo! continues to lose market share in its core operations.
Something has to be done. This is why new management was brought in and I don’t think Thompson will stand and watch the company slide into oblivion without some drastic action. The year 2012 should be an interesting year for Internet-related stocks!
|Total 2012 per share earnings for 30 stocks in the Dow Jones Industrial Average:||$900|
|Dow Jones Industrial Average Price/earnings multiple:|
|Dow Jones Industrial Average Dividend Yield:||2.4%|
|10-year U.S. Treasury Yield:||2.17%|
This shouldn’t be a surprise to the readers of Profit Confidential.
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