Analysts Debate: Is Yahoo! a Top Stock?
The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.
In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing web pioneer Yahoo! .
Yahoo! by the numbers
Here's a quick snapshot of the company's most important numbers:
Result (Most Recent Available)
$4.0 billion (includes $2.8 billion gain on Alibaba stake)
Mail, Finance, Flickr
627 million unique visitors per month
Yahoo's recent acquisition of Tumblr pretty much sums up the business for me. Search is struggling, display ads are dropping, and Yahoo! can't quite figure out what its identity is. Is it search? Display ads? Or just an Internet portal?
A search deal with Microsoft in 2009 was supposed to be a game-changer for both Microsoft and Yahoo!, but it's now a technology Marissa Mayer is reportedly trying to farm out to Google. A recent search extension of the 2009 deal came with a revenue guarantee for Yahoo!, and in a year the company can leave for Google if performance doesn't pick up.
Yahoo! has already turned to Google for some display ads, an area in which it has struggled mightily to monetize itself. Now that the company is farming out search and even display ads, Mayer has gone on a search for more eyeballs, hoping to draw users into any number of other products Yahoo! has.
But Yahoo! has become an amalgamation of websites that don't seem to have any cohesion. As a finance person, I use Yahoo! Finance every day, but the site doesn't look anything like the main page, Flickr, shopping, or any of the company's other sites. Being a finance user simply doesn't draw me into the Yahoo! platform.
At least with Google and Facebook I know what I'm getting when I go to their sites. Facebook is well defined as a social network at its core, and Google is a search company. Sure, Google has just as many peripheral sites as Yahoo!, but the core is search and everything else branches out from that. What is Yahoo! at its core? A news site? A search engine?
It's possible that Mayer will be able to turn Yahoo! into a magical company that can grow and monetize the millions of people who come to the site every day. But my money is better spent on Google, which has proved it can grow and evolve around a core competency. I'll stay away from Yahoo! stock for now. (If you want to see more details into why, you can check out my personal take here.)
Yahoo! has certainly been off to the races over the past couple of months as Mayer's hands-on management approach has yielded much-needed cash from the sale of part of its stake in Alibaba. Mayer had mentioned that Yahoo!'s strategy would mostly entail small purchases -- it's made 10 acquisitions so far -- but she pulled out the big guns earlier this week by snatching up Tumblr for $1.1 billion. The big question now on everyone's minds is whether Mayer's strategy will be a success, or if Yahoo!'s going down the same downtrodden path once again.
I'd certainly say things could go either way. In the plus column, Tumblr's 300 million unique monthly users will give Yahoo! the sorely needed readership boost it's needed from millennials. These younger viewers are what will give Yahoo! a chance to drive mobile ad growth and could perhaps even put an end to its slumping display-ad sales.
On the other hand, Tumblr is only recently beginning to monetize its potential with ads, and Yahoo! may have drastically overpaid for what's currently a hot website. Yahoo! also purchased Flickr back when it was extremely popular and sucked the majority of the enthusiasm right out of the photo-sharing site by aligning Flickr's goals with its own rather than allowing Flickr to flourish through its own innovation. It's true that Yahoo! has redesigned Flickr's home page and introduced an updated Android OS app, which should help boost viewership, but it could still be too little, too late.
Normally I look at investments from a purely fundamental standpoint, but I think history has given me more than ample reason to question this latest rally in Yahoo! Although I agree with a lot of the moves Mayer has been making as CEO, which would make me hesitant to bet against Yahoo!, it's trading at 17 times forward earnings, and the chances that Yahoo! seamlessly integrates these acquisitions and doesn't revert to its old ways seems pretty small. You can read a more thorough analysis of my take on Yahoo! by clicking here, but I would suggest donning the yellow caution tape and revisiting Yahoo! in six to 12 months.
Is Yahoo! a top stock? No, it is not. Is it a bad stock? I don't think that's true, either.
I'm generally pessimistic on Yahoo!'s ability to turn Tumblr into a moneymaker, simply because it reminds me so much of GeoCities, another badly overvalued fad that Yahoo! bought at its hottest over a decade ago. Back then, "blogs" didn't exist, the Internet was much smaller, and monetization strategies were a lot less evident -- but that doesn't mean Yahoo! has a clear path to turning Tumblr into a torrent of profit, either. It's not like there are no other options available in terms of blogging platforms, and the perceived "stickiness" of a given blog platform matters less, in my mind, than that of a comparable social site. It's a difference between broadcasting and sharing. Yahoo! is a leader at broadcasting content, but it hasn't figured out the whole sharing thing, and Tumblr won't help. Nor does Yahoo!'s core business show a lot of potential. Years of playing second fiddle to Google in a number of areas has made Yahoo! look outdated and archaic, and a minimal mobile presence only serves to further marginalize the Yahoo! brand relative to the other major online players.
However, I'd like to call attention to two things my colleagues haven't mentioned: its remaining Alibaba stake and its part-ownership of Yahoo! Japan, which trades on the Tokyo exchange at a roughly equivalent market cap to its American progenitor. These two positions represent a significant chunk of Yahoo!'s present value and are probably responsible for the lion's share of its valuation growth over the past year.
Some analysts, particularly over at Forbes, have made the case that these stakes should grant Yahoo! a somewhat higher per-share price than current levels, because the company's core business is significantly undervalued when accounting for Alibaba's highly anticipated IPO and Yahoo! Japan's swelling market cap. I examined these claims when writing my own take on how to appropriately value Yahoo! today, and you can read more by clicking here.
When breaking down the pros and cons of Yahoo!'s present and future opportunities, I find it hard to agree with estimates that peg Yahoo! to much higher prices. I actually believe that Yahoo! is priced at appropriate levels today for a company with no real domestic growth prospects and a stated intention to reduce its stake in valuable foreign holdings. Based on that, I'd expect nothing more than performance in line with the indexes going forward, which isn't enough to justify putting a CAPScall on the stock today in either direction.
The final call
There you have it, our first unanimous "meh" rating of a stock. We all agree that there's some value and potential for Yahoo! but that it's an uphill climb for Marissa Mayer and company. We won't be making an outperform or underperform call today, but you can check out the 31 calls we have made in the past year and see how those calls have outperformed the market by 547 points so far.
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The article Analysts Debate: Is Yahoo! a Top Stock? originally appeared on Fool.com.Fool contributors Alex Planes and Sean Williams have no position in any stocks mentioned. Fool contributor Travis Hoium manages an account that owns shares of Microsoft. The Motley Fool recommends Facebook and Google and owns shares of Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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