Yahoo! Inc.: The Incredibly Simple Reason to Be Bullish on Yahoo Stock

YahooMore Upside for Yahoo Stock?

Potential candidates for the recovery of assets of the former flagship of the Internet, Yahoo! Inc. (NASDAQ:YHOO), have until Monday night to come forward. After holding back for much of the past year, CEO Marissa Mayer has had enough of clutching at straws: Yahoo is for sale and buyers have until 11:59:59 pm on April 18 to submit bids. (Source: “The Clock Is Ticking as Yahoo Hits the Auction Block,” Vanity Fair, April 15, 2016.)

Yahoo stock has increased steadily since the sale rumors intensified last January. Had you bought Yahoo stock then, you would have made a respectable 29% return to date. Perhaps some investors may have worried about the veracity or, better yet, the viability of a Yahoo sale. After all, what would buyers do with YHOO stock that the company itself could not do under Mayer’s leadership in the past four years or so?

Shareholders could be getting a big check if the buyer agrees to acquire Yahoo’s crown jewels as well. The problem is that without Alibaba Group Holding Ltd (NYSE:BABA) and Yahoo’s Internet assets, the company would simply be a shell. (Source: “Is Verizon the only one that wants Yahoo?CNN Money, April 18, 2016.)

As it turns out, Yahoo has many attractive assets. In addition to its Internet assets, Yahoo stock also includes a 35% stake in Yahoo! Japan and the aforementioned stake in Alibaba (15%), which are the two jewels in Yahoo’s crown. At the end of 2015, the Alibaba stake was worth some $30.0 billion. Melissa Mayer did not sell it, fearing that the taxes on the transaction would offset any gains.

There have been many serious contenders bidding for them, including Time Inc (NYSE:TIME). Time has eyed Yahoo to help regain advertising revenue. This is because several million users worldwide still visit Yahoo’s homepage. Visitors especially like sections such as Yahoo! Finance or Yahoo! Sports. Indeed, Yahoo reported having over a billion users per month in 2014. (Source: “Yes, Time Inc. Buying Yahoo Actually Makes Some Sense. Here’s Why,” Fortune, February 23, 2016.)

The current shareholders of Yahoo could be tempted to cash a big check and quickly too. This would leave Yahoo as a mere shell. Without its Internet assets, Yahoo no longer exercises any activity. Even if it kept its Alibaba stake, this apparent gold mine would continue to remain unproductive because the tax problem that worried Mayer has not gone away. U.S. tax authorities are just waiting to be able to get their hands on the capital gains generated by this operation, so without paying a large sum in taxes, Yahoo’s BABA stock holdings cannot be sold off. Therefore, it is likely that the company that ends up with Yahoo’s Internet assets, will also get its shares in Alibaba.

Microsoft Corporation (NASDAQ:MSFT) was aware of Yahoo’s potential back in 2008. It launched a $45.0-billion hostile bid that year for Yahoo and it is rumored to be one of the top contenders for Yahoo assets now. (Source: “Is Microsoft in the Yahoo bidding hunt?,” USA Today, March 28, 2016.) There is no need to go that far in 2016. Nevertheless, Yahoo’s assets will certainly attract enough bidders that the fire sale might not be as discounted as Yahoo’s recent lackluster performance would suggest.

But, as the Cinderella-like deadline approaches, there is one candidate that stands out: Verizon Communications Inc. (NYSE:VZ). Verizon has gone up in value over the past week on rumors it would purchase Yahoo, despite the company suffering a highly visible strike. Doubtless, Verizon sees value in Yahoo’s assets, such as its Web portal, its news sites, and its e-mail service, Yahoo! Mail. Indeed, Verizon wants Yahoo to enhance the activities of its subsidiary AOL, bought for $4.4 billion.

As the Verizon rumors reached fever pitch, London’s Daily Mail newspaper intervened last week with its own interest in bidding for Yahoo. It confirmed to The Wall Street Journal that it was in talks with investment funds to bid for Yahoo! Finance, Yahoo! Sports, Yahoo! News, and the company’s video activities. (Source: “Deal or no deal, Yahoo is just the start for the Daily Mail’s US push,” The Guardian, April 12, 2016.)

Yahoo stock has gotten bad press because of the infighting at the board level with hedge fund Starboard Value disappointed by Marissa Mayer and its director, Jeff Smith’s, proxy fight to replace the whole board.

Yet, in 2015, Yahoo’s revenue increased 7.6% to almost $5.0 billion! The group could also boast well over 650 million users of its services on mobile devices while video views on its sites rose 80% year-over-year. The problem was its net loss of $4.4 billion.

In early February, CEO Marissa Mayer opened the doors to dismantling and announced a restructuring plan to save $400 million by the end of the year. It provides for a reduction of 15% of the workforce (about 1,500 jobs) and the closure of its offices in Dubai, Mexico City, Buenos Aires, Madrid, and Milan. The goal: to give priority to growth markets, such as North America, the United Kingdom, Germany, Hong Kong, and Taiwan.

With its $210-billion market capitalization and its $4.5 billion in available liquidity, Verizon wants to get hold of all of Yahoo’s Web activities, as well as its stake in Yahoo! Japan, which is valued at a little less than $10.0 billion. This could exacerbate the battle between Yahoo’s board of directors, but Mayer probably considered this before officially putting Yahoo’s Internet assets on the block.

Still, Yahoo shareholders could well end up with a nice check at the end of the battle, which is reaching its much-awaited conclusion.