Yahoo's Analyst Day Leaves Many Questions Hanging

Yahoo's analyst day Wednesday addressed the steps the struggling Internet pioneer is taking to reposition the ship and revive its under-performing stock, but on the subject of a controversial transaction involving one of its major Asian investments, its executives left a number of questions unanswered.

Yahoo's (YHOO) webcast, which is scheduled to run from 11 a.m. to 5 p.m., kicked off with its brazenly blunt and embattled CEO Carol Bartz taking the stage with founder and board member Jerry Yang (left) and Chief Financial Officer Tim Morse (right) to address the Alipay-Alibaba Group transaction before diving into the agenda.

Bartz, who was brought in two and a half years ago to turn around the struggling company, is seeking to woo investors who are increasingly loosing patience as the company's revenue growth, without its partners' contributions, have deteriorated and its stock price has sputtered along. The company has held three analyst days in the past 18 months to tout its message of better days ahead, whereas most large corporations typically hold one, or perhaps two, a year.

Wall Street is particularly interested in how Yahoo plans to extract value out of its assets in Asia, which account for more than half of its value. Bartz and crew have been under fire recently for getting blindsided when one of their major Asian investments, Alibaba Group, transferred ownership of its Alipay online payment company to a company operated by Alibaba's CEO Jack Ma, notes Deutsche Bank analyst Jeetil Patel, in a recent research note.

Despite analysts' questions over how Yahoo could have been "surprised" by the transaction -- and concerns that Yahoo should have known from the get-go, given that it has a board seat on Alibaba -- Bartz and Yang continued to say that the issue is in the past, and that the two companies, along with a third Alibaba investor, Softbank, have agreed not to discuss the past nor details of the current negotiations around the Alipay transaction.

What Bartz and Yang did say regarding the matter was that the Chinese government is in the process of licensing online payment systems, and that Yahoo, as well as Alibaba Group and Softbank, wanted to ensure that Alipay would get its license and be among the first round of companies to receive one. In order to increase its chances of being in that early group, they said, the thinking was to put Alipay's ownership under a business that was owned 100% by Chinese nationals. Alipay is still awaiting its license.

Looking for a Coherent -- and Profitable -- Asia Strategy

Alipay, along with online auction site, which relies on Alipay to process its transactions, are part of the Alibaba Group. Yahoo has been waiting for the day when Alibaba Group takes Taobao and Alipay public, which could dramatically enhance the value of its investment in them.

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Yahoo investors, meanwhile, have wondering when it would finally start seeing some profit from its Alibaba investment. As a result, some analysts questioned whether a repeat of the Alipay fiasco would later occur with Taobao, but Yang referred back to the principles that drove the Alipay transaction in the first place, and sidestepped the issue of whether steps have been taken to prevent another surprise down the road.

Yahoo and the other two companies are currently negotiating with Alipay to ensure they get a fair value for the transaction and Bartz noted all parties are "committed to reaching an agreement."

Alipay's contribution to Taobao, similar to that of PayPal to eBay, is a value that will be retained by Taobao, said Morse, noting that all parties involved are in agreement on that. But where it's downright murky is how they'll determine what value to place on Alipay's non-Taobao transactions, or how much should that be worth going forward, he added.

Yahoo, as well as investors, don't want to incorrectly assess Alipay's value, or what Yahoo should receive for it.

10 Questions Investors Need Answered

Yahoo investors will also be keen to hear why its search alliance with Microsoft's (MSFT) hasn't delivered as planned, and about the company's strategy for mobile, social networking and video, says Mark Mahaney, a Citigroup analyst, in a recent research note.

Mahaney offered a handy "top 10" tips sheet for investors listening into the analyst day webcast on the questions they will likely want answered:

  • Can you provide more details around the Alipay restructuring?

  • Why did Display Advertising growth underperform the broader Interactive Advertising Bureau (IAB) data?

  • What are the issues facing the search alliance with Microsoft?

  • how much operating margin expansion can this management team deliver?

  • How does Yahoo manage the rising competitive influence of social media companies?

  • What are Yahoo's social, mobile and video strategies?

  • What's Yahoo's mergers and acquisition strategy?

  • How is Yahoo performing internationally?

  • What are Yahoo's plan for its balance sheet?

  • Is the company done with investing in its core infrastructure?

Mahaney, as well as Patel, have a "hold" on Yahoo's stock. Both are waiting for the company to transform from a "show-me company" into one that is delivering revenue growth and results.

Over the past year, Yahoo's stock has underperformed the Nasdaq and lagged behind rival Google (GOOG).

yahoo stock chart
yahoo stock chart

"Valuation remains intriguing, but we're still waiting for convincing Top-Line Turnaround Story Proof" Mahaney notes in his report. "[Operating expense] discipline is clearly on display [advertising]. Asia assets liquidation catalyst is now unclear given the Alipay restructuring. Also, the [Microsoft] Search transition is not going smoothly. YHOO's Display segment is growing, tho underperforming IAB benchmark, and competition is mounting. We believe YHOO shares have upwards bias, but we don't have real conviction."

Patel says he's sticking with his "hold" recommendation for now because Yahoo's ability to profit from its China assets appears increasingly at risk.

Said Patel prior to the analyst day, "We remain on the sidelines due to lack of growth on the core business and limited visibility into Asia monetization."

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