Is an Outperform in Yahoo’s Future?

With shares of Yahoo (NASDAQ:YHOO) trading around $37, 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.

The Yahoo page for games, gaming news, and trial downloads is about to undergo some changes. The site is launching a new games platform for developers: The Yahoo Games Network is a platform for third-party developers who want to bring their games to Yahoo. News of the new developer backend page came in the form of an announcement on Yahoo’s official Tumblr on Wednesday. The post, written by Jesper Jensen, GM at Yahoo Games, says that the new platform is just the beginning of changes ahead for Yahoo Games. “We plan to keep building out our platform with improvements and new features — providing not only a great experience for our millions of users, but also a cross-platform network for developers looking to reach the untapped gaming audience of Yahoo’s 800 million users worldwide (including 400 million users on mobile),” he said. Yahoo currently has a diverse games page, but it seems the company is looking to expand on its current offerings and reach its games to Web, Apple, and Android devices. The new platform offers support, hosting, monetization options, and analytics for companies that create the games Yahoo users will be playing.

T = Technicals on the Stock Chart are Mixed

Yahoo stock has been trending higher in the last several months. However, the stock is currently trading sideways and may need time to stabilize 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 between its rising key averages which signal neutral 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

36.18%

50%

48%

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

April Options

Average

Average

May Options

Average

Average

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

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

31.43%

-6.67%

66.67%

52.17%

Revenue Growth (Y-O-Y)

-5.94%

0.33%

-6.78%

-6.62%

Earnings Reaction

-8.71%

-0.86%

10.34%

-0.37%

Yahoo has seen rising earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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), Microsoft (NASDAQ:MSFT), and sector?

Yahoo

Google

AOL

Microsoft

Sector

Year-to-Date Return

-5.66%

6.32%

-5.86%

7.91%

1.67%

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’s page for games is launching a new games platform for developers. The stock has been moving higher in recent quarters, but is now trading sideways. Over the last four quarters, earnings have been rising and revenues have been decreasing, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Yahoo has been an average year-to-date performer. Look for Yahoo to bounce back.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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