Seriously.
I’ve never met Marissa Mayer, and based on the few times I’ve heard her present she might very well become a great CEO… but we are talking about $YHOO here. Of course some of $YHOO’s stock rise (from ~$15.50 when she was hired to a current ~$23) has to do with the hope and faith in her ability to turn around their US core business. But will they? Possibly, but not likely, at least not to the extent people are expecting or hoping for. Yes, $YHOO has hundreds of millions of users & visitors, but most of their business is still reliant on display advertising, which is a declining business, especially with the ongoing shift to mobile.
Google ($GOOG), where Marissa achieved her major success and recognition, has always had their cash cow to fall back on, enabling them to work on many ventures over time, giving them the ability to create future money makers. $YHOO does not have that luxury.
When I wrote my bullish thesis on $YHOO (YHOO isn’t really Yahoo! & YHOO to $60.41?) $YHOO’s core US business had a tiny implied value. Meaning, if you stripped out the company’s cash & Asian assets, an investor was getting the US core business for very close to nothing. To the extent that when $YHOO was trading under $14, there was actually a negative stub!
As I wrote back then, the value had nothing to do with the US business, it was all about unlocking the value of the Asian assets.
When Dan Loeb purchased his stake in $YHOO, did he know Marissa was going to come on board and save the company? No, this was never the thesis.
As you can see in my updated $YHOO spreadsheet – (the first tab, cell E-28) – the implied value of the $YHOO core US business is pretty close to my fair value estimate (cell B-13) for it.
Look at all of the company’s earning growth over the last couple of years, it’s has all come from the “Earnings in Equity Interests” line of the income statement. Those are the Asian assets, not the US core business. Look at the second and third tabs of the spreadsheet, see how well Alibaba & Yahoo Japan have performed!
The US business however has gone nowhere. As a matter of fact, the company’s ex-TAC revenues and adjusted EBITDA was flat at around $4.5B & $1.7B respectively over the last three years, while their cash flow from operations & free cash flow has actually decreased in 2012 over 2011.
So if it wasn’t Marissa & the US core business, why did $YHOO stock soar almost 50% since she joined? There was a clear unlocking & appreciation of their Asian assets.
1 – The original Alibaba deal was announced (and while this was originally announced prior to Marissa joining $YHOO (on May 20th) the use of the cash was still up in the air (and actually exacerbated when Marissa joined and filed this 8-K in August causing a 10% decline in the stock). It was only later (in September) when $YHOO committed to return almost all of the Alibaba money to shareholder that the stock started its ascent.
2. Yahoo! Japan’s stock went from 22,000 to 40,000 yen per share.
3. Alibaba’s Jack Ma resigned, followed by multiple rumors/reports of Alibaba IPO plans.
All of these events strengthened the real bull thesis - the sum of the parts valuation. This had always been the bull case, and until we see some meaningful turnaround in the US core business, with all due respect to Ms. Mayer, this isn’t “her” rally.
Said differently, I honestly believe that the stock would be at or at least close to the same level if Ross Levinsohn was still CEO.
As you can see from the spreadsheet, my current fair value for $YHOO is around $24 per share (which has gone up from my original ~$22 fair value estimate, mostly due to the increased value of Alibaba & Yahoo! Japan). I wish I didn’t, but as the stock approached $20 I liquidated my entire position because the risk-reward just wasn’t/isn’t as compelling unless you believe(d) the US core turns around.
Actually, if/when the company sells more of their Asian holdings, more and more of the stock’s current fair value (as a percentage) will be tied to the US core business. Back when I was buying $YHOO, that percentage was close to zero, based on my current spreadsheet, it’s around 30%. The higher that percentage gets, the more I will dislike $YHOO and after the Alibaba IPO, if the stock rises much higher, I would actually consider shorting it.
- MicroFundy
Just my view, but if Yahoo core never grew, and they used 5 Billion (cash on hand), 7.5 Billion (Yahoo Japan and forward after tax), and ~15 billion (alibaba IPO after tax) on buybacks, the EPS could easily double. That’s the largest buyback program on the street. See HD. Today they use 18% of market cap to buyback. Investors love buybacks. See TRV. No growth, but active buybacks. This is the story. Growing Yahoo core and we may see 5 bucks a share. seriously. Shares outstanding went from 1.2 to 1.05 in 6 months. Sill have 2.5 in current program.
Eric,
Your point was one I have made in the past (see http://microfundy.com/2012/07/25/yhoo-to-60-41-14/). However, I think you made several wrong assumptions. Buyback has ~700M left, not $2.5B, Y! Japan after tax AND after a liquidity discount is probably worth closer to $5.5B vs $7.5B. And lastly i have Alibaba at ~$8.4B vs $15B. You can see how a derived those numbers on my SOTP spreadsheet – https://docs.google.com/spreadsheet/ccc?key=0AsV6whYCC52pdEQ1RzQ5d01fZjhGUmRUWHNyNVo5T2c#gid=3 .
Thanks for the comment!
- MicroFundy
In response…Buyback has 2.66 Billion left. please read latest 10-Q. 700 million is from Alibaba, and they had more left from buyback program beforehand. See 10-Q from May. I also think you are way off with YJ and Alibaba. YJ is nearly 29.5 billion. I take 35% of that. 10.325. (Since the Alibaba share sale in 2012 was taxed at 31.5% I use that again). 7 billion with forward contract bringing in over 500 million. Alibaba is done similarly. I thin it IPOs fo 70 Billion and trades to 100 or more day 1. Just my thoughts…
Should include that I have not included liquidity discount.
LOL. i have read probably read every 10-Qs in the last few years. What you are referring to is the $2.66B left as of March 31st on a $5B that runs for another couple years – a buyback that was announced prior to Alibaba deal. As of today, Marissa’s words – 700M remaining on the Alibaba money buyback.
Good luck on getting anywhere close to that from Y! J – of course you need to include liq + taxes. i think $5.5Bil is very fair (if not generous) valuation.
Alibaba valuations are all over the place. IPO will probably come in on the low end – because if they float few shares, they can actually force YHOO to sell 1/2 of remaining stake with no net dilution at a below market price. I agree that remaining 1/2 – 10% of Alibaba will have the largest upside.
- MicroFundy