Will Yahoo Head Higher After Recent News?

With shares of Yahoo (NASDAQ:YHOO) trading around $36, 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 has been working for many months on an online video service that could compete with Google’s (NASDAQ:GOOG) YouTube, and according to a recent report from Re/code, Yahoo has begun to poach YouTube’s talent to help it get there. Sources familiar with Yahoo’s strategy told Re/code that the company is looking to lure away YouTube’s biggest talent with better pay in order to build the first real competitor to Google’s online video service. YouTube’s biggest stars and networks are being offered more money than Google pays to show their content on Yahoo’s service.

Re/code reports that YouTube video creators have frequently complained about the low pay they receive from the company, and Yahoo is offering content producers either better ad revenue or guaranteed ad rates for their videos. Yahoo also plans to offer extensive promotion on its heavily trafficked homepage as well as the opportunity for producers to sell their own advertising.

Yahoo CEO Marissa Mayer has been working tirelessly to turn the company around after taking the helm two years ago. Mayer believes video can become a major part of those efforts. She even presented Yahoo’s second-quarter earnings last year in a video presentation shot like a news broadcast, saying she wants to make video a “primary area of investment over the next year.”

T = Technicals on the Stock Chart Are Mixed

Yahoo stock has been trading sideways over the last couple of quarters. However, the stock is currently surging higher and looks set to continue. 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 signals 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

38.74%

70%

68%

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 WEdnesday, there is 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 increasing 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 = Weak 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

-9.32%

1%

-5.45%

10.4%

-1.84%

Yahoo has been a poor 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 been working for many months on an online video service that could compete with Google’s YouTube. The stock has been trading sideways over the last couple of quarters but is currently surging higher. 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 a poor year-to-date performer. WAIT AND SEE what Yahoo does next.

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