Tuesday, September 23, 2014

Time to buy Yahoo?

From $44 on September 15th, the price of Yahoo stock has fallen to $39 today after a modest rebound from recent declines.  The company's role as a surrogate for investment in Alibaba is now over.  What is the value of Yahoo now, and what is the potential of both its investments and its core franchise?

Having established a position here at $15.50 in May 2012, the incentive to add more at this level is not strong, but that is not the right way to think.  If there is more value, perhaps adding a few shares would be wise.  Yahoo still owns 16% of Alibaba's stock outstanding and 35% of Yahoo Japan, the company's most successful effort at organic growth during its life span.  These two investments easily support a Yahoo stock price in excess of $30, some would say $35.  What is the ongoing company worth?

It seems that Yahoo today is more of a technology management platform than a technology innovator.  That talent has long moved on.  The challenge now is to turn Yahoo into a successful mobile platform and into a creative and compelling content provider.  Marissa Mayer has acquired Tumblr(why?) and made multiple small acquisitions during her two year plus tenure at the firm, looking to acquire talent and new ideas.  When these acquisitions jell into something that tangibly drives revenue growth rather than primarily adding expenses is not yet known.  There are many that are pinning their hopes on Mayer, but her vision is not yet broadly clear.  If, a big If, her efforts reinvigorate the main Yahoo franchise with its still substantial eyeball reach, the value of the company could easily rise to $50..  If the core franchise is valued at zero, there is an investment entity that can be valued in the $30 to $35 range.

The bet here is that Mayer will eventually confound her many critics, both inside and outside of the company, and see some benefit from her actions.  Legacy expenses are a big issue, as Yahoo's expense base is out of line.  Dealing with this will not win Mayer a popularity contest, but it must be done.  Revenue growth is the long term goal, but it must be built off of an efficient foundation. If she does not do it, somebody else will.  Yahoo will stay in the spotlight now, and a CEO's continuity of employment will require results, not drama.

It is incredibly reassuring here to see that as of June 30 Will Danoff, sole manager of Fidelity's 100 billion Contrafund, remains Yahoo's largest fund shareholder.  He is not necessarily always right of course, but he is more often than not and his insight has served him and Fidelity well.  As a low key analyst and skilled observer of people, he would understand completely what was written in the prior paragraph.  And he's still there.



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