Description
The bridesmaid looks prettier than the bride … while everyone is taken with Google, I recommend Yahoo! as an attractive long investment, because it is unloved and inexpensive on a core basis.
I will focus directly on the valuation, because I believe the compelling price makes up for any uncertainties about competitive dynamics (versus Google) and management succession (will Jerry Yang remain the long-term CEO?)
BUSINESS
Yahoo! Inc. is a leading global Internet brand and one of the most trafficked Internet destinations worldwide. Yahoo! is focused on powering its communities of users, advertisers and publishers by creating indispensable experiences built on trust. To its users, Yahoo! provides its owned and operated online properties and services, as well as access to third-party content and services. To its advertisers and publishers, Yahoo! provides a range of marketing solutions and tools that enable businesses to reach users who visit the Yahoo! properties and to reach the users of its distribution network of third-party entities who have integrated the Company’s advertising offerings into their websites or their other offerings.
ASSETS
Net cash – As of September 30, 2007, Yahoo! had net cash of $2 billion, or $1.50 per Yahoo! share.
In addition to its core business, Yahoo! owns two significant equity interests:
Alibaba Group – Yahoo! owns 44% (39% on a fully diluted basis) of this leading China search, on-line marketplace and on-line payment system company. Alibaba.com, Alibaba Group’s business-to-business e-commerce subsidiary, completed its IPO on the Hong Kong Stock Exchange in November 2007. Looking through, Yahoo! owns 27% (39% x 70% post-IPO ownership of Alibaba.com by Alibaba Group) of Alibaba.com. Based on the quoted stock price of HK$27.45 per share, Yahoo!’s stake is worth $4.9 billion, or $3.70 per Yahoo! share. Analysts estimate that the remaining Alibaba Group assets are currently worth $1 per Yahoo! share, and could be worth significantly more over the next few years.
Yahoo! Japan – Yahoo! owns 34% of Yahoo! Japan. Based on the quoted stock price of 50,000 yen per share, Yahoo!’s stake is worth $9.1 billion, or $6.80 per Yahoo! share.
Total non-core assets $11.50 per share.
Please note that the book basis of the non-cash equity investments above is about $2 billion, which implies some taxes payable if these investments are ever sold outright for cash. However, I suspect that given these interest are foreign holdings, and owned in partnership with others, there probably exist tax-efficient ways to monetize of these holdings. Yahoo! does not appear to address this issue in its filings.
VALUATION
Backing out the value of its non-core assets, Yahoo! currently trades at approximately $12 per share.
|
|
2005 |
2006 |
2007E |
2008E |
2009E |
|
|
|
|
|
|
|
|
Net Revenues |
$3,696 |
$4,560 |
$5,079 |
$5,841 |
$6,790 |
|
EBITDA |
1,557 |
1,896 |
1,909 |
2,179 |
2,598 |
|
|
|
|
|
|
|
|
Shares Outstanding |
1,487 |
1,458 |
1,404 |
1,404 |
1,404 |
|
|
|
|
|
|
|
|
EBITDA/share |
$1.05 |
$1.30 |
$1.36 |
$1.55 |
$1.85 |
|
|
|
|
|
|
|
|
Core EV/share |
|
|
$12 |
$12 |
$12 |
|
|
|
|
|
|
|
|
EV/EBITDA |
|
|
8.8x |
7.7x |
6.5x |
Yahoo! Seems to agree that its stock price is cheap, as it has bought back large amounts of stock recently. For example, in the third quarter, Yahoo! repurchased 23 million shares (1.7% of shares outstanding) at an average price of $26.09 per share.
In addition, insiders have purchased stock on the open market at current prices, including Susan Decker, the president, who purchased 47,000 shares in August at $24 per share. While the size of the purchase is largely symbolic, Ms. Decker is likely to be aware that every move by her is heavily scrutinized, now that she is a director of Berkshire Hathaway.
RISKS
There seem to be four main categories of risks for Yahoo!
Competition – with large competitors like Google, Microsoft and AOL, Yahoo! must constantly innovate to keep up.
Privacy – with different regulators in different parts of the world, YAHOO! must navigate carefully in order not to lose the trust of its user base. Sometimes the company is unsuccessful in its efforts, as demonstrated recently by some court cases in China.
Macroeconomics – with a somewhat more traditional advertising model than Google, Yahoo! may be subject to some cutbacks in advertising expenditures in case of a U.S. recession.
M&A – Yahoo! has been active in acquiring smaller companies, and runs the risk of pursuing value-destructive transactions.
I currently have a long position in YHOO, but this may change at any time.
Catalyst
The stock market currently loves industry leaders (Google) and heavily discounts followers (Yahoo!). Eventually Yahoo!’s valuation discount should be reduced. Other low probability, high pay-off outcomes may include an acquisition by or other accretive transaction with Microsoft, who is making a strong (and thus far, failed) attempt to achieve market leadership in the internet space.