Is Yahoo Well-Positioned for the Future?

With shares of Yahoo (NASDAQ:YHOO) trading around $40, 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.

Since taking the helm at Yahoo in July 2012, Marissa Mayer has made some dramatic and expensive moves. Her latest decision to discharge the company’s second in command, chief operating officer Henrique de Castro, can be counted among them. In an internal memo obtained by the tech website Re/code, Mayer reflects on her pride in the company’s achievements throughout 2013 as well as her optimism for the year ahead. “During my own reflection,” she writes, “I made the difficult decision that our COO, Henrique de Castro, should leave the company.”

The tides at Yahoo have certainly turned. It was just over a year ago that Mayer pilfered de Castro from Google — her old stomping grounds – to serve as the company’s “top ad executive and liaison to marketers on Madison Avenue,” reports the Wall Street Journal. But apparently, he couldn’t deliver. In 2013, Facebook overtook Yahoo as the second largest seller of digital ads worldwide, according to a report by eMarketer. Yahoo’s percentage of total digital ad share worldwide also tumbled from 3.37 percent in 2012 to 2.87 percent in 2013. No matter how you shake it, Mayer’s change of heart will be costly. According to the Journal, de Castro’s severance package could be worth as much as $42.1 million, which includes $41.5 million in restricted shares, $600,000 in cash severance and $7,672 worth of continued health benefits.

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 time to consolidate 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 above its rising key averages, which signal 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

34.83%

83%

80%

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 today, there is an 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 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 Q3

2013 Q1

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%

-3.00%

Yahoo has seen mixed earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about 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

-0.57%

3.25%

12.98%

-2.22%

4.36%

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. Marissa Mayer latest decision to discharge the company’s second in command, chief operating officer Henrique de Castro will be costly as his severance package could be worth as much as $42.1 million. 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 produced conflicting feelings among investors. Relative to its peers and sector, Yahoo has been an average year-to-date performer. Look for Yahoo to OUTPERFORM.

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