Is Yahoo Poised to Head Higher?

With shares of Yahoo (NASDAQ:YHOO) trading around $35, 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.

Shares of Yahoo closed Tuesday’s regular session up 2.29 percent at $34.21 and jumped as much as 7 percent higher in post-market trading after the technology and Internet company reported first-quarter results that beat analyst expectations. Revenue of $1.13 billion, down 1 percent on the year, beat the mean analyst estimate of $1.08 billion, and revenue excluding traffic acquisition costs (TAC) increased 1 percent to $1.09 billion. Adjusted net earnings of 38 cents per share were flat on the year and beat the mean analyst estimate by a penny.

“I am really pleased by our first quarter performance, marking our best Q1 revenue ex-TAC since 2010,” commented Chief Executive Officer Marissa Mayer. “Buoyed by our 9th consecutive quarter of year-over-year growth in Search revenue ex-TAC and our first quarter of Q1 year-over-year growth in display revenue ex-TAC since 2011, Q1 was an early and important sign of growth in our core business.”

T = Technicals on the Stock Chart are Mixed

Yahoo stock has been pulling back over the last couple of quarters. However, the stock is currently surging higher and looks set to continue this path. 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

37.11%

55%

53%

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

May Options

Average

Average

June 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?

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

6.32%*

-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 been pleased 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), AOL (NYSE:AOL), Microsoft (NASDAQ:MSFT), and sector?

Yahoo

Google

AOL

Microsoft

Sector

Year-to-Date Return

-9.68%

-1.84%

-10.90%

11.83%

-1.64%

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 yesterday reported first-quarter results that beat analyst expectations. The stock has been pulling back over the last couple of quarters, but is currently surging higher. Over the last four quarters, earnings have been mixed 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. WAIT AND SEE what Yahoo does next.

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