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With Yahoo On The Ropes, Mayer can still Lead A Big Turnaround!

Jan 31 2014, 2:15am CST | by

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With Yahoo On The Ropes, Mayer can still Lead A Big Turnaround!

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With Yahoo On The Ropes, Mayer can still Lead A Big Turnaround!

Yahoo! (YHOO) is very much on the ropes and its shares have suffered a shellacking after the Internet giant posted disappointing fourth quarter results, exacerbated by an even more uninspired guidance for the first-quarter of 2014. Predictably, that sent Yahoo’s stock tumbling 8.7%, to $34.89 a share yesterday, Jan. 29, 2014. Some analysts were quick to forecast the worst for one of the world’s largest providers of online content and services.   

Time to turn your back on Yahoo and dump its stock? Not so fast.

The promise of a turnaround isn’t lost and by some analysts’ account, it’s very much within reach. Skeptics easily forget that Yahoo CEO Marissa Mayer, formerly of Google, did the incredible task of not only re-energizing Yahoo’s slumping stock when she took over the helm but in fact drove it higher –  more than doubling its stock price — an almost impossible feat considering the dismal state the company was wallowing in.

So Mayer, who has been on the job for 18 months, deserves huge credit for that dream investors had been conjuring up, and should be allowed extra room to do what she must do: Elevate Yahoo to the high level it deserves to traverse the worldwide Web with its hundreds of millions of monthly users who visit Yahoo’s online properties, making it one of the world’s most popular Internet destinations.

Yesterday, S&P Capital IQ upgraded Yahoo to a buy from a hold rating, raising its stock price target to $45 a share from $36. “After the stock’s 7%-8% decline, we now see Yahoo as attractively valued,” says S&P Capital IQ analyst Scott Kessler.

“Our increased price target reflects what we see as significant value associated with minority stakes in China’s Alibaba Group and Yahoo Japan,” he adds. Additionally, Kessler believes Yahoo’s “newer offerings and monetization efforts coupled with an increased focus on mobile would help stabilize fundamentals.”

Kessler argues that there’s “notable value in the stock,” helped by Yahoo’s “strong and flexible balance sheet.” Part of Yahoo’s treasured assets are its 24%stake in privately held Chinese Internet conglomerate Alibaba and its 35% interest in Yahoo Japan.

Oppenheimer analyst Jason Helfstein increased his price target for Yahoo to $43 a share from $38 largely because of its stake in Alibaba. He notes that while Alibaba’s third-quarter results were weaker than expected, he believes Yahoo shares ”are the best way to play Chinese e-commerce.”

The analyst is maintaining his rating of outperform on the stock ”as the base-case target assumes 14% upside,” he says, “with limited downside risk due to Yahoo’s Asian assets.” He assumes that Alibaba will launch an IPO next year with an estimated valuation of $142 billion.

Investors should snap up shares of Yahoo “on any weakness,” advises Jordan E. Rohan, analyst at investment firm Stifel, as he expects Yahoo’s April earnings “will highlight Alibaba’s seasonally strong fourth quarter numbers.” He has reiterated his buy rating on Yahoo and price target of $49 a share, based on his sum-of-the-parts analysis. The estimated valuation, he says, is largely dependent on the pace of share repurchases and valuation of Yahoo’s stakes in Alibaba and Yahoo Japan.

Rohan expects Yahoo will sell its 24% stake in Alibaba in two tranches: 40% of the holdings which he values at $120 billion sometime on or before an IPO, and the remaining 60% that he estimates is worth $200 billion sometime after the IPO.

What about the promised Yahoo turnaround? Analyst Mark S. Mahaney of RBC Capital continues to rate Yahoo as outperform based largely on CEO Mayer executing a big turnaround.

“We Remain believers in a potential turnaround story at core Yahoo,” he asserts. History suggests that this will be a multi-year process built on important products and improved execution, says Mahaney. Although he notes that he hasn’t seen any positive fundamental impact from the accelerated pace of product innovation, “we believe and hope this could happen sometime in 2014,” he says.

In terms of the stock, Mahaney says the advantage of buying the stock at this point is that the “current valuation still implies modest expectations.” He notes that Yahoo continues to return cash to shareholders through share repurchases while still investing in the business and executing acquisitions.

His upside scenario: He expects an acceleration of the turnaround process, bumping up his estimated “three-year net revenue compounded annual growth rate to 4%, with EBITDA margins expanding close to 35% on this large base.”     

Source: Forbes


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