Will Recent News Hurt Yahoo’s Stock?

With shares of Yahoo (NASDAQ:YHOO) trading around $34, 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 CEO Marissa Mayer faces a $10 billion decision in a few months. The pivotal moment will come when the Chinese e-commerce leader Alibaba Group completes its initial public offering of stock — an enormous deal that triggers a provision requiring Yahoo to sell about 40 percent of its stake in the company. The sale is expected to generate a windfall that will intensify pressure on Mayer to revive Yahoo’s revenue growth after years of lethargy.

T = Technicals on the Stock Chart Are Weak

Yahoo stock has been pulling back over the last couple of quarters. The stock is currently trading sideways 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 signals neutral to bearish price action in the near-term.

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

38.60%

40%

38%

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

June Options

Steep

Average

July Options

Steep

Average

As of Thursday, there is 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 Mixed 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 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-17.14%

31.43%

-6.67%

66.67%

Revenue Growth (Y-O-Y)

-0.61%

-5.94%

0.33%

-6.78%

Earnings Reaction

6.25%

-8.71%

-0.86%

10.34%

Yahoo has seen mixed earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Yahoo’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

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

Yahoo

Google

AOL

Microsoft

Sector

Year-to-Date Return

-14.4%

-7.97%

-26.3%

10.69%

-8.49%

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. Company CEO Marissa Mayer faces a $10 billion decision in a few months. The stock has been pulling back over the last couple of quarters and is currently trading sideways. Over the last four quarters, earnings have been mixed and revenues have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Yahoo has been an average year-to-date performer. WAIT AND SEE what Yahoo does next.

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