Is YHOO Stock Ready for a Turnaround?
Yahoo! Inc. (NASDAQ:YHOO) is fast approaching its tipping point. Yahoo! stock has continuously dropped under the leadership of CEO Marissa Mayer, but recent developments point to a resurgence of YHOO stock.
The story of Marissa Mayer is so disappointing. I was hopeful when she took the helm of Yahoo! almost three-and-a-half years ago. There was a company in dire need and this young hotshot CEO steps up with a bold turnaround package. (Source: “Grading Marissa Mayer’s Yahoo! Turnaround Attempts,” Fortune, November 20, 2015.)
It was the kind of tale that gripped the imagination of finance nerds across the country. Imagine that Yahoo!, once the symbol of an energetic and enterprising young technology firm, revived its former greatness. Who wouldn’t like that?
Sadly, Marissa Mayer’s plans didn’t work out. Her expensive acquisitions went nowhere, the company lacked cohesion, and she’s facing pressure from large investors. At this point, either she’s replaced as CEO or her strategy starts to work.
Regardless, it looks to me like Yahoo! stock could shoot through the roof.
How Marissa Mayer Failed Yahoo! Inc.
Marissa Mayer kicked up Yahoo!’s acquisition strategy after taking control of the firm. It bought roughly 40 startups and tried to set up a video streaming platform. To draw in an audience, Yahoo! tried out a few original shows and the niche comedy sitcom Community.
Community has a cult following for its oddball comedy, but the viewership wasn’t strong. Eventually, $42.0 million had to be written down in the video division. The loss is a perfect example of how Marissa Mayer is failing Yahoo! stockholders. (Source: “Why Yahoo! wrote down $42 million for ‘Community’,” Fortune, October 20, 2015.)
She definitely has the right idea in trying to make Yahoo! into a media-focused version of Amazon.com, Inc. It draws a huge audience to its news site rather than through online shopping, but the model is roughly the same.
Yahoo! wanted to add on a video section to compete with Netflix, Inc., deliver advertising content through an artificial intelligence matching engine, and find new ways of monetizing its user base of one billion.
To boil it down, Yahoo! wanted to engage its audience in a way that would make it a necessity. The for-profit service needed to be crucial to users, but it never was. Marissa Mayer had all the pieces—she just couldn’t make them fit.
The Endgame for Yahoo! Stock
On the upside, that leaves only two paths for Yahoo! stockholders. Either Marissa Mayer is replaced or she finds a way to make the strategy work. Here’s how both these outcomes could play out.
A major hedge fund was originally pressuring Mayer to spin off Yahoo!’s 384 million shares of Alibaba Group Holding Limited, valued at roughly $32.26 billion. The same fund was also adamant that Yahoo! get rid of its Japan division, which is a profit center. (Source: “When all else fails, Yahoo! decides to ‘focus’,” Fortune, October 20, 2015.)
Both sales would have brought in enough revenue to keep Yahoo! going for several years. The funds would also buy Marissa Mayer enough time to make the pieces fit together in a way that guarantees Yahoo! a future. After all, the company did just bring in McKinsey & Co., one of the world’s best consultancies, to take a look over its numbers. Yahoo! stock could shoot through the roof.
In the above scenario, Marissa Mayer could keep her job, but then the hedge fund changed its mind. It’s now pushing for a sale of Yahoo! to end the nightmare of recent years. If that happens, Marissa Mayer will not only be out of a job, but she will have officially failed. However, Yahoo! stockholders would be well compensated.
A third scenario is that she simply steps down and someone else takes her place. A prominent analyst released a short list of replacements recently and the stock actually ticked up. Investors are clearly out of patience with Marissa Mayer.
However, the important thing to remember is that all three scenarios suggest a higher YHOO stock price. Even if the news isn’t good for Marissa Mayer, that doesn’t mean it won’t be good for Yahoo! stockholders.