Can Yahoo Recover?

With shares of Yahoo (NASDAQ:YHOO) trading around $33, is YHOO an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Yahoo is a technology company that provides search, content, and communication tools on the Web and on mobile devices worldwide. It operates Yahoo.com, which offers Yahoo Search, Yahoo News, Yahoo Sports, Yahoo Finance, Yahoo Entertainment and Lifestyles, and Yahoo Video. Being such a large content provider, Yahoo is able to reach a significant amount of consumers across the globe. As the Internet attracts an increasing number of participants, look for Yahoo to continue to be a major player.

Yahoo, on Tuesday, reported results for the quarter ended June 30, 2014. “Our top priority is revenue growth and by that measure, we are not satisfied with our Q2 results. While several areas showed strength, their growth was offset by declines. Yahoo Search, for example, had a strong quarter, growing 6 percent year-over-year on a revenue ex-TAC basis and 19 percent year-over-year in search click-driven revenue. Our social, mobile, video and native areas also grew with significant momentum, collectively gaining nearly 90 percent year-over-year. However, display remains an area of investment and transition. In Q2, we saw display revenue decline, further highlighting the fact that we need to work faster to ameliorate the negative trends. I believe we can and will do better moving forward,” said Yahoo CEO Marissa Mayer. “Overall, I remain confident in Yahoo’s future, our strategy, and our return to long-term growth.”

Non-GAAP income from operations was $194 million for the second-quarter of 2014 compared to $209 million in the second-quarter of 2013. GAAP net earnings for the second quarter of 2014 was $270 million (which included restructuring charges of $33 million, net of tax, and gains from sales of patents of $43 million, net of tax), a 19 percent decrease compared to $331 million in the second-quarter of 2013 (which included restructuring charges of $2 million, net of tax.) Non-GAAP net earnings for the second quarter of 2014 was $382 million, a 1 percent decrease from the same period of 2013. GAAP net earnings per diluted share was $0.26 in the second-quarter of 2014 (which included restructuring charges of $0.03 per diluted share and gains on sales of patents of $0.04 per diluted share), compared to $0.30 in the second-quarter of 2013. Non-GAAP net earnings per diluted share was $0.37 for the second-quarter of 2014, compared to $0.35 in the second quarter of 2013.

T = Technicals on the Stock Chart Are Weak

Yahoo stock has struggled to make positive progress over the last couple of quarters. The stock is currently pulling back and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Yahoo is trading below its rising key averages which signal neutral to bearish price action in the near-term.

YHOO

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Yahoo options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Yahoo options

40.40%

66%

64%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Yahoo’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Yahoo look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

-13.33%

-17.14%

31.43%

-6.67%

Revenue Growth (Y-O-Y)

-4.49%

-0.61%

-5.94%

0.33%

Earnings Reaction

-4.72%*

6.25%

-8.71%

-0.86%

Yahoo has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been disappointed with Yahoo’s recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has Yahoo stock done relative to its peers, Google (NASDAQ:GOOG)(NASDAQ:GOOGL), AOL (NYSE:AOL), Microsoft (NASDAQ:MSFT), and sector?

Yahoo

Google

AOL

Microsoft

Sector

Year-to-Date Return

-11.93%

4.46%

-12.75%

13.47%

-2.68%

Yahoo has been an average performer, year-to-date.

Conclusion

Yahoo is an Internet bellwether that provides a multitude of services to consumers and companies worldwide. The company on Tuesday reported second-quarter earnings that left investors disappointed. The stock has struggled to make positive progress and is currently pulling back. Over the last four quarters, earnings and revenues have been decreasing. Relative to its peers and sector, Yahoo has been an average year-to-date performer. WAIT AND SEE what Yahoo does next.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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