Yahoo! (NASDAQ:YHOO) is a digital media company focused on generating advertising revenue from the traffic to its websites. The company attracts users via its various content and service offerings such as Yahoo! News, Fantasy Sports, and Yahoo! Mail. Year to date, Yahoo’s stock has been relatively range-bound, trading between $14.50 and $16 per share. We currently have a $19 price estimate for Yahoo, which is approximately 25% above the market price.
We believe the difference between the current market price and our valuation is attributable to the market applying a discount to the cash generated by the partial sale of the Alibaba stake, an underestimation of the stickiness of Yahoo’s user base to its sites, and the view that the company lacks growth opportunities.
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Yahoo to Keep Some Cash from Alibaba Stake Sale
We currently estimate that Yahoo’s investment in Alibaba and Yahoo! Japan account for approximately 60% of its total value. Since the Alibaba deal has already been announced, implying a relatively certain value, the stand-alone undervaluation of Yahoo! Japan (currently 20% of the company value) could partially explain the difference between the Trefis price estimate and the current market price.
However, a more likely reason is that investors are discounting Alibaba’s total value and the cash that a partial sale of the Alibaba sale will bring to Yahoo. The company announced that it might not distribute all of the cash to be generated via the sale, and it seems that investors believe that any new investments from this cash by Yahoo will be a value destroyer. However, we disagree on this front as the renewed product focus shown by Yahoo in recent months makes us think that the company can increase user engagement with new products. If the company deploys the cash from the Alibaba stake sale to successful investments, it can leverage its already large user base to generate higher page views per user.
Third Highest Unique Visitors in US for May 2012
According to Nielson, for May 2012, Yahoo properties had approximately 152 million unique visitors, which was the third highest after Google and Facebook. Additionally, Yahoo’s average monthly minutes per person spent on its properties was approximately 151 minutes per unique visitor, which was second only to Facebook. The relatively high number of unique visitors and their relative stickiness to its properties will help the company increase user engagement as it invests in newer, more innovative products.
Product Focus and Mobile to Drive Growth
We think Marissa Mayer’s appointment as CEO of Yahoo brings into its boardroom an individual with strong experience in product innovation. In this light, we view it as a positive sign that the company might not distribute all of its cash from the Alibaba sale because it shows confidence in Marissa Mayer’s ability to capitalize on growth opportunities.
Additionally, we think mobile product innovation is a major growth avenue in the future as more users engage with the Internet via their mobile devices. The company is seeking to capitalize on this trend by introducing new and improving existing apps such as IntoNow. If Yahoo, via increased investments, succeeds in innovating on the mobile front, it will not only increase engagement from its current users but also attract new users to its properties.
Risk Factors: Content Competition and Poor Investments
Since Yahoo is primarily a content provider, at least for now, it faces immense competition from sites like Huffington Post and Youtube for Internet traffic. If the company is not able to compete with these content providers and fails to maintain its unique visitor numbers, we could see a downside to our price estimate. Additionally, if Yahoo invests the cash generated from the sale of its stake in Alibaba into poor performing assets or acquisitions, we could see these investments destroy value for the company.
We have a $19 Trefis price estimate for Yahoo, which implies a 25% upside to the current market price. We believe that the company’s high unique visitor numbers show that the site continues to be attractive to users. Additionally, we think that Yahoo is capable of innovating on the product front and leveraging its current user base to increase traffic to its sites. Yahoo! competes with firms like AOL and Google for Internet traffic.