Wednesday, January 1, 2014

YHOO – Yahoo Stock Has Room to Run Under Mayer’s Leadership

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Welcome to the Stock of the Day!

YHOO stock, yahoo stockSome users of Yahoo!’s (YHOO) free email haven’t been able to access their accounts since Monday. What started as an ordinary service outage has devolved into a big PR headache for Yahoo.

However, all the while, Yahoo stock shares have continued to climb this week. What has these investors singing a different tune? Should we follow suit?

Find out today.

Company Profile

Yahoo! is one of the world’s largest internet corporations. With nearly 12,000 employees and operations in 25 countries, Yahoo is widely recognized for its web portal, search engine and email service. This stock is a testament to how quickly new opportunities can open up in the tech sector. In the 1990s and early 2000s, Yahoo was the darling of the internet industry.

But in the new millennium the company has had some difficulty adapting to increased competition and lightning-fast upgrades issued by companies like Google (GOOG). The company continued to lose market share through the years until things came to a head in early 2012. That year, Yahoo saw 14% of its workforce cut and the ouster of then-CEO Scott Thompson. But then in summer 2012, former Google exec Marissa Mayer was appointed CEO and Yahoo hasn’t been the same since.

Alibaba IPO

Despite headaches caused by Yahoo Mail, Yahoo stock shares have held steady this week. That’s because in other parts of the web, Yahoo is plowing ahead. Yahoo’s 24% stake in China’s e-commerce giant Alibaba will pay off this holiday season.

On Single’s Day, China’s version of Cyber Monday, Alibaba generated $5.7 billion in merchandise revenue. This is very good news for Yahoo because it drums up further interest in Alibaba Group’s IPO, which is slated for Q1 2014 (but Alibaba is working to delay it until as late as December 2014).  Yahoo will be required to sell 40% of its current stake when Alibaba goes public, so a higher price means a better deal for Yahoo. Analysts estimate that Yahoo’s stake in Alibaba is currently worth $36 billion.

M&A Buzz

Meanwhile, the M&A frenzy continues. The latest rumor is that CEO Marissa Mayer is seriously considering a buyout of photo-sharing site Imgur. Run by just ten people the site has more than 100 million users. Imgur has been more successful in monetizing its service than many other social media and sharing websites, so analysts estimate that Yahoo would need to offer $100 million to $500 million for the company.

In other news, Yahoo also expanded its mobile presence by recently acquiring QuikIO, a video streaming app for Apple Inc’s (AAPL) iOS devices. With this latest acquisition, Yahoo has made 29 acquisitions, the biggest deal being the buyout of Tumblr in June.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. After a rocky 2012, YHOO has spent the past twelve months in buy territory. This stock is an interesting case because on the fundamental sides, Yahoo receives a D-rating overall.

That’s because YHOO receives less-than-stellar grades for five of the eight metrics I grade it on, including sales growth, operating margin growth and earnings growth. Marissa Mayer has spearheaded an aggressive acquisition strategy and this has weighed on earnings in the short-run. But with analysts projecting double-digit earnings growth through the end of 2014, I expect Yahoo to improve its balance sheet soon enough.

Meanwhile, YHOO is A-rated in terms of Quantitative Grade, indicating that it’s still a favorite of institutional investors.

Bottom Line: As of this posting, I consider YHOO a B-rated Buy. Marissa Mayer has accomplished a lot in her first year and change at Yahoo and I’m confident that the company will continue to progress under her leadership.

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