Will Yahoo Head Higher After Recent Headlines?

With shares of Yahoo (NASDAQ:YHOO) trading around $39, 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.

Mobile marketing company Sparq said late Tuesday on its website that it has been acquired by Yahoo. ”Words cannot describe how ecstatic we are to be joining such an amazing team with an inspiring mission. We see endless opportunity ahead,” said Jesse Chor, Sparq’s chief executive, according to a statement posted on the firm’s website. The company will be terminating its current service and is reaching out to existing customers with support details, Chor said in the statement, which offered no further details about the deal.

T = Technicals on the Stock Chart Are Strong

Yahoo stock has been exploding to the upside in the last several months. However, the stock is currently trading sideways and may need to consolidate. 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 above its rising key averages, which signals neutral to bullish 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

38.04%

96%

94%

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

Put IV Skew

Call IV Skew

February Options

Flat

Average

March Options

Flat

Average

As of Wednesday, there is average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish 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 Increasing 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-6.67%

66.67%

52.17%

-2.15%

Revenue Growth (Y-O-Y)

0.33%

-6.78%

-6.62%

1.64%

Earnings Reaction

-0.86%

10.34%

-0.37%

-3%

Yahoo has seen mixed earnings and 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), and Microsoft (NASDAQ:MSFT) — and sector?

Yahoo

Google

AOL

Microsoft

Sector

Year-to-Date Return

-1.11%

3.76%

6.97%

-3.66%

2.49%

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

Conclusion

Yahoo is an Internet bellwether that provides a multitude of services to consumers and companies worldwide. The company has acquired mobile marketing company Sparq. The stock has been moving higher in recent quarters but is now trading sideways. Over the last four quarters, earnings and revenues have been mixed, 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 OUTPERFORM.

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