Breakup Could Send YHOO Stock Soaring
Yahoo! Inc. (NASDAQ:YHOO), the star of the Internet that was launched in 1995 by Stanford University students David Filo and Jerry Yang, may be heading toward a breakup. What does it mean for YHOO stock?
On December 9, Yahoo’s board decided to spin off the Internet business. The Yahoo! brand would then remain and its fortunes, becoming ever more entwined in those of online retailer Alibaba, would retain its 15% stake, valued at $32.0 billion.
This decision comes as Yahoo!, which includes a web portal, a news site, Yahoo! News, and its Yahoo! Mail e-mail service, still has a strong userbase. In the United States, Yahoo! is third to Google and Facebook but worldwide, Yahoo! Mail can still count on more than 270 million users. (Source: “By the numbers: 45 Amazing yahoo Statistics,” Expanded Ramblings web site, November 7, 2015.)
Yahoo! itself does not expect to survive the onslaught from Facebook, as more and more people turn to its apps, as well as competition from Google and various apps and startups, including WhatsApp, Instagram, or Snapchat, which are much more popular among the younger generations.
For Yahoo!, it is a case of stopping while the company is still successful. Last quarter, Yahoo!’s revenue increased eight percent to $1.2 billion, but its profit slumped 99% to $76.0 million.
However, who would buy Yahoo!’s pieces? Perhaps a telecom operator? Its userbase has aged quite a bit, falling behind Google, Facebook, and Snapchat. Since Marissa Mayer became Yahoo!’s CEO three years ago, nothing much has changed other than the amount of media attention she has drawn to the company. Nevertheless, Yahoo! was always a popular brand name; identification was never going to be one of its issues.
Rome, too, was great and its “brand” remains as valuable today as it was in antiquity and as far as anybody knows, all roads still lead to it. Nobody doubts that Yahoo! is one of the Internet pioneers, but like so many great empires before it, the company has entered its period of decadence and decline. It is better to recognize this early, conceding that it lacks the freshness of a Snapchat or Instagram, rather than hang on and allow the stock to lose even more value.
Yahoo! Lacks the Tools to Recover
Yahoo! is losing market share and has few solutions to revolutionize mobile communications. Sooner or later, even Google (four years younger) and Facebook (10 years younger) will be facing similar problems. Yahoo! is 20 years old, which is closer to 100 in Internet years; investors and analysts on Wall Street have been waiting for Yahoo!’s big recovery, but it has not arrived. In three years, Yahoo! stock rose from $15.00 to $50.00, before dropping to the mid-$30.00s it remains at today—a far cry from its $100.00-per-share days of the late 90s and early 2000s.
Now Yahoo!’s biggest proposition is its 15% stake in Alibaba, its one foothold on the future. Thanks to capital gain taxation regulations, Yahoo! has not sold its stake in the Chinese retail giant, so it can survive around that platform, as it considers getting out of the Internet altogether.
Will Yahoo! Shut Down?
Yahoo! has developed many apps for news, sports, messaging, or weather, but none of these has captured the market lead. Drawing inspiration from one of the most successful companies of all time, General Electric, it was time to take an “if you’re not in the top two, it’s best to get out” approach. Yahoo! is still too small in the mobile sector; it’s not even close to matching, let alone beating, Facebook or Google.
Even if Yahoo! could resolve its mobile sector gap, it would still fail to recover to its heyday and shareholders should realize that Marissa Mayer is not the problem; replacing her won’t fix Yahoo!’s malaise, which is more existential than market- or business-related. The company simply has no avenues to evolve. The evolution is being led by startups, which tend to finish their orbits around Google or Facebook after their initial rounds of success. (Source: “Why Yahoo faded: The Internet changed, but it didn’t,” CNET, December 9, 2015.)
Yahoo! relies on older users. The young—and nowadays, they start using the Internet at a very young age—do not go to Yahoo! Perhaps if the company had bought Twitter, Snapchat, or any of the other popular apps before they were discovered by the market, Yahoo! could have survived in its original business. Now, the brand name may have a future left, but not as part of the current business model.
The Bottom Line on YHOO Stock
YHOO stock is not completely finished; it still has a strong reputation and a $33.0-billion market cap. Analysts believe it’s worth some $3.0 billion–$5.0 billion, or even $8.0 billion—all less than the Alibaba stake—and that’s why the time is right now for the next big step in its evolution. (Source: “Here’s how much Yahoo is really worth,” Business Insider, December 10, 2015.)
As to the potential buyers, some established or growing mobile operators, such as Verizon, may want to get into it. Media tycoons may also find some use for Yahoo!’s pieces to expand their own brand. Meanwhile, the millions of Yahoo! Mail users would be reluctant to change services, so that aspect offers a strong market point. Yahoo! has reached the end of an era and a year from now, it will look much different than it does now.