Every kindergartener knows that Yahoo! (YHOO, Financial) is damaged goods. Bloodthirsty analysts penned the company’s eulogy immediately after the dotcom bubble went splat – and with good reason. Crunch the numbers, and it’s plain to see Yahoo! is worth more dead than alive.
Oddly enough, that juicy tidbit is precisely the reason investors should have a little faith in the company.
Four years ago, rock star CEO Marissa Mayer was lured away from Google for a ridiculous amount of money to help get Yahoo! back on track. It’s been a long and bumpy road. After just a year on the job, Mayer helped the company to post a jaw-dropping 84% spike in income. The bulk of that money has come through bold acquisitions and a few shrewd investments. Unfortunately, those investments haven’t been able to prosper, thanks to a whole lot of dead weight at the company.
What’s the dead weight holding Yahoo! back? Yahoo!, actually. And after years of beating around the bush, Mayer has finally admitted it.
This week, the company posted a set of decent Q4 results that narrowly beat analyst expectations. Revenues hit £1.002 billion, equating to an EPS of around 2 cents. That’s not spectacular – but it’s not too bad, either.
As a search engine, we all know Yahoo! is struggling. Don’t believe me? Google it. Gross search revenue has dropped 7% year over year to $866 million, paid clicks are down 10%, and the company is bleeding cash trying to secure new search partners. Yahoo’s traffic acquisition costs (TAC) have spiraled completely out of control. Across the board, TAC hit $271 million last quarter – up from just $74 million the year before.
That being said, Yahoo!’s core businesses actually posted a pretty good quarter. Mavens (mobile, video, advertising and social) revenue rose 26% in Q4 to $472 million and jumped 45% across FY2015. That success was driven largely by Yahoo!’s unpredictably strong mobile sector, which accounts for some 24% of all traffic-driven revenue. Gross mobile revenue for Q4 hit $449 million.
Yahoo!’s advertising business had a pretty good year, too. GAAP display revenue came in at $601 million, with an 8% increase in ads sold and a 6% price-per-ad hike.
On the surface, it sounds like Yahoo!’s core businesses are doing pretty well – and they are. But the company has spent far too much attempting to expand Mavens, and the impressive growth these businesses have posted simply isn’t impressive enough to sustain the company’s losses elsewhere. That’s why the board has finally announced it’s ready to begin exploring “strategic alternatives” for these core businesses.
Translation: Yahoo is about to conduct a reverse spin.
The cogs have already been set in motion. On Tuesday, the company announced it will shed 15% of its global workforce in a desperate bid to cut $400 million in revenue expenses. Why? To further increase the value of Yahoo!’s core businesses so that they’ll look nice and shiny for prospective buyers. Believe it or not, that’s great news for investors.
Despite boasting an unsustainable TAC, Yahoo!’s core businesses are making a whole lot of money – and under the right leadership, they could be making even more. No matter where they end up, they're all winners. On the other hand, it’s hard to visualize anyone foolish enough to purchase Yahoo!’s search business. Yet even by shedding the expense of its more successful parts, Yahoo! as a corporate entity will start to make huge gains.
Right now, the company’s stake in Chinese Internet giant Alibaba (BABA, Financial) is actually worth about as much as Yahoo!’s overall market value. The same can be said of Yahoo!’s shares in independent subsidiary Yahoo! Japan, which are appreciating at break-neck speed. By getting rid of expensive operations and riding the coattails of said investments, this spinoff is a golden opportunity for Mayer. Yahoo! as we currently know it will soon become a dusty relic of the past. Yet by setting the company alight, we’re bound to see a far more intriguing (and profitable) beast emerge from its ashes.
So sure, the company might seem like a dud now – but the truth is, Yahoo! has a lot of potential. Wary investors should bear that in mind before they consider jumping ship.
