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Could Yahoo’s Comeback Be Well in Sight?

September 29, 2012 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
While possibilities are still remote at Yahoo (YHOO), recent operations beg a very interesting question – could Yahoo be on its way back up? Indeed, a growing positive sentiment towards its stock has been noted among various sections of analysts, signaling increased expectations.

Not long ago, laymen and pundits were rambling about Yahoo’s dismal performance. Some satirical analysts even noted that Yahoo had transformed its familiar gutter into a home. All the same, things are now changing and bullishness seems to be creeping back into Yahoo.

What triggered the change in attitude?

Doubled efforts and guided moves

I personally have to hand it to Marissa Mayer. Ever since the former Google executive took hold of the reigns earlier this year, Yahoo’s doubled efforts have been notable. What many have not noted, however, is the canny decision-making that now characterizes Yahoo. I call it guided moves. The recent Chinese Alibaba deal fully demonstrates these so-called guided moves.

What happened?

Yahoo sold half its stake at Alibaba, netting a handsome figure of around $4.5 billion. Here’s the catch: while many analysts (including me) thought that a substantial amount of the money was going to be used in acquiring emerging technologies alongside other acquisitions, a lump sum of $3 billion was set aside for a suspected stock buyback program. In simple terms, $3 billion was given back to investors.

After critically analyzing this move, something interesting flared in my mind – Yahoo went back to the basics. Let me bring you up to speed: if you can recall your Business 101 lectures you certainly remember something like, ‘a business must meet the needs of its varied stakeholders.’

How does this apply?

By merely giving back $3 billion to investors, Yahoo balanced all the needs of its most important stakeholders in one bout. The most important stakeholders as per the moment are the consumers in the market, the management and of course, investors.

For a long time, investors have been sounding off over disappointing earnings. Yahoo has also not been in a position to dish out lumpy dividends. As such, there has been a lot of discord among investors. This $3 billion will quell the raging fire and give the management some breathing space amid fierce competition from avid competitors like Google (GOOG).

The management on the other hand is more than happy. Under Marissa Mayer, Yahoo has managed to make notable progress, streamlining activities and settling for more tactful strategies. I believe I don’t have to delve extensively into this to make it more elaborate – the frictionless sealing of the Alibaba deal couldn’t say less.

Moving over to the market, and perhaps the gist of my argument, you will note that this section of stakeholders have been given notable consideration. Mayer, at the time of writing, was to release a major plan for Yahoo. Similarly, she has previously echoed that she had big plans for the Alibaba money, highlighting the possibilities of notable acquisitions alongside other advancements. With all this in mind, Yahoo’s intentions to reclaim its market share become crystal clear.

I believe Mayer’s strategy is to create tranquility among investors and to motivate the management so that Yahoo as a whole can move forward without the all-too common sideshows. If she makes progress with this (which she already is), then Yahoo’s comeback could certainly be in sight.

A wider look at the market

While Yahoo still commands the largest following of email users, Google’s Gmail seems to be making significant inroads. Yahoo’s email service has 70 million users while Gmail has 42 million. A once popular AOL Mail from AOL Inc. (AOL) trails with 23 million users.

I believe, however, that Yahoo still has a very long journey as far as grasping the full attention of the market is concerned. Players like Google have shown that making big money is all about being versatile. Renowned for its search engine service, it has stepped away from business as usual and ventured into social media, rivaling social media giant Facebook (FB) with its G+ service.

Amid heated competition between Facebook and Google, Mark Zuckerberg – renowned Facebook CEO – has even hinted that Facebook may launch its own search engine, signaling the changing trends and increased diversity in the industry. Yahoo, therefore, has to at the least diversify its service package in order to compete on level ground. Notwithstanding, the doubled efforts and guided moves – as earlier explained – spell a lot of hope.

Before concluding, this table shows Yahoo’s current position with regard to its close competitors, giving a more definitive picture of how things are at the moment.

YHOO AOL GOOG
Net Income 1.10B 1.01B 11.11B
Earnings Per Share 0.89 10.11 33.77
PE 17.74 3.34 21.76


Source: Yahoo finance

Given the PE ratios alone, AOL seemingly passes out as the cheapest and safest investment; this is especially so after considering that its net income is not far behind Yahoo’s 1.10B. Nonetheless, the low PE ratio suggests that there are no expectations at the moment. This leaves Google and Yahoo, which both have high PE ratios, suggesting the high expectations that investors hold in the two stocks. However, Google has a much higher EPS and as such has happier investors. Yahoo therefore needs to glean higher incomes and record higher earnings per share. If it doesn’t, investors will feel as if they are paying too much for nothing and go for more viable options like Google.

In conclusion, Yahoo’s current position isn’t all that inviting. All the same, the heightened tempo could change its fortunes in the long haul. However before this happens, it is a hold.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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