Wednesday, 29 January 2014

Yahoo - thinking it through

Yahoo divides opinion.  As it happens I am still a big user of their portal page and find it easy to navigate and find plenty of different content.  Additionally I note efforts to improve this.  Others disagree and some (link here) even think that the core US business cannot be saved.  And then there are the significant minority interests in Asia. 

The shares have performed well over the last year, but there are some fairly clear differentiations in the underlying performance. 

To get a feel for this, first take a look at the key financial metrics.  Falling revenue, ebitda and operating income...but look at the 'earnings in equity interests' line.  As noted above, there are some clear business differentiations here. 

Let's look at the core business.  With Google a key statistic is the net growth of paid clicks.  Yes, prices again are falling (a trend we have also seen at Google) but it is the net rise that matters.  In Q4 this was 14%.  That reflects poorly against the average of the previous three quarters statistics of 13%, 16% and 17%, but is not a disaster.  The paid clicks business is still fine.

The same cannot be said though of the display business - and here is the differentiation with Google.  The net number here at -4% is the best for a year but nothing to really shout about.  2013 has been a difficult year in this regard - far harder than 2012.  This is the basis of much of the above-mentioned criticisms. 

As noted above, the equity interest line was strong, although the profit translation from Yahoo Japan was impacted by the weaker Yen.  The rise in the share price more than made up for that though.

Here comes the difficult valuation aspect of Yahoo.  The company usefully provides a valuation of the above two stakes in the numbers BUT this is necessarily subject to lots of change and evolution.  Are either of these a realisable sale price...and what about the various Alibaba valuations floating around the internet of up to US$125bn (and hence Yahoo's stake at US$30bn)?  And then there is tax to worry about...

Given all the above, I don't think a combined valuation near US$30bn is not too bad an estimate.  With a Yahoo EV of US$36bn that puts the core business on a x10 ebit valuation. 

And that's the valuation debate across all of Yahoo.  Will spending any more of the US$2bn cash pile add value or not and how successful will the content push be?  What is the realisable value of the Asian investment?

The big downside for Yahoo is not continued tough trading in the US - although clearly this will not help.  The big downside is in Asia/Chinese internet related valuations.  That is what has the scope to drive the share sub US$30.  Good job then that China remains the biggest online growth market out there...

Bringing it all together - and from a zero position today - I am looking to start building below US$35 and then augment at US$32.5 and US$30. 

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