Is Yahoo! Poised For A Breakout Year?

yahoo truckMarissa Mayer has made big moves since taking over as Yahoo!’s

(NASDAQ:YHOO) CEO less than a year ago. Currently the fourth-most visited webpage on the Internet, Yahoo! has acquired more than ten companies since January — most notably the blogging site Tumblr. Rumors are circulating about the possible acquisition of Hulu, as the company seeks to expand its Internet presence. Yahoo’s stock price has surged 61 percent in the Mayer era, but is the company positioned for long-term success? Let’s use our CHEAT SHEET investing framework to determine whether Yahoo! is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

Yahoo’s stock price closed up 4 percent at $24.95 on Tuesday, as investors were upbeat after the company’s annual shareholders meeting. CEO Mayer announced that the number of daily users on photo-sharing site, Flickr, jumped 50 percent since last year, while the Yahoo’s mobile email user-base is up 70 percent. Mayer credited the company’s success over the past year to a new focus on mobile growth and improved employee morale.

Yahoo’s board recently approved the acquisition of blogging website Tumblr for $1.1 billion. Mayer projects that the popular blogging website will increase Yahoo!’s Internet traffic by 20 percent. Shareholders criticized the high price of the acquisition, noting that Tumblr only generated $13 million in revenues last year; however, with the synergies resulting from the acquisition and Yahoo’s proven success in advertising revenue growth, Tumblr is projected to generate a top line of $100 million in 2013. Still, with Tumblr’s unproven success in generating revenues, it is unlikely that this acquisition will substantially boost company profits in the next few years.

While Yahoo’s domestic search engine business has lost market share to Microsoft’s (NASDAQ:MSFT) Bing and Google (NASDAQ:GOOG), the company has  capitalized on Asian search engines Yahoo Japan and Alibaba in China. In fact, these two businesses make up more than half of Yahoo’s current market cap of $28.28 billion. At its IPO, Alibaba is expected to be valued between $60 billion and $80 billion. Alibaba has the ability to buy back half of Yahoo!’s 24 percent stake, from which Yahoo stands to make between $8 and $13 billion in cash at the IPO. Yahoo! could potentially use this cash in hand to initiate a share buyback, further raising its share price.

S = Support is Provided by Institutional Investors

Yahoo has been a popular investment for mutual funds in the past year. Mutual funds have increased their stake to 61 percent of Yahoo’s outstanding shares, up 10 percent from last November. Support from mutual funds is an important indicator for Yahoo’s future since these types of funds generally invest in companies they believe to be strong in the long-term.

E = Excellent Performance Relative to Peers?

Yahoo currently trades at a trailing price to earnings multiple of 7.35, which suggests that it is relatively less expensive than Google. Google, however, is a safer investment and has more growth prospects, so clearly it should be valued at a higher multiple. Yahoo enjoys a higher gross margin than its competitors, Google and AOL (NASDAQ:AOL). Yahoo’s growth estimate is the highest of the group as well, for FY2013, as analysts believe that Mayer will enjoy continued success as CEO in expanding Yahoo!’s internet presence and mobile apps business.

Yahoo! Google AOL
Trailing P/E 7.35 26.16 3.08
Gross Margin 0.68 0.58 0.31
Growth Est. (2013) 20.50% 15.80% -86.70%

T = Technicals are Mixed

Yahoo! is currently trading at around $25.37, below its 50-day moving average of $26.24, but above its 200-day moving average of $22.82. Yahoo has been on a strong uptrend since Mayer assumed her role as CEO last July. Recently, after hitting a new 52-week high of $27.68, the price has been volatile and has not shown a definitive trend in either direction.

 

Conclusion

Mayer has put Yahoo in a good position to expand its Internet presence and profitability. Yahoo already has around 650 million users and has the potential for many more with the recent acquisition of Tumblr. Yahoo’s mobile app strategy looks promising, but is relatively unproven at this time, especially since mobile devices do not generate as much advertising revenue as desktop web pages at this time.

Since quarter-over-quarter earnings decreased 6 percent in the second quarter, and a substantial portion of Yahoo’s market cap is composed of Yahoo Japan and Alibaba rather than its core businesses, we believe that Yahoo is too high for our risk profile. Yahoo is probably too expensive at $25.35, so investors will see better prices to initiate a long position in the near future. For now, Yahoo is a WAIT AND SEE.

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