Can Yahoo! Inc. (YHOO) Continue Its Excellent Returns?

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Yahoo! Inc. (NASDAQ:YHOO) has increased in price by about 70% in the last year, as the company’s sale of its assets has created shareholder value and generally left the markets with a favorable impression of new CEO Marissa Mayer. Thanks to cost cutting, even though Yahoo experienced a decline in revenue in the first quarter of 2013 versus a year earlier the company recorded about a 10% increase in operating income. It is currently valued at 18 times forward earnings estimates, suggesting that the market is expecting moderate to high growth over the next few years.

Another way to look at Yahoo is to use a sum of the parts analysis based on its geographies, as its operating income is actually less than its earnings from equity interests. Yahoo! Inc. (NASDAQ:YHOO) still owns a stake in Alibaba Group; if we assume that the valuation has increased from Alibaba’s most recent round of financing, this could be worth between $10 and $12 billion. Then there is Yahoo! Japan, whose valuation has increased substantially in recent months on a rising Japanese stock market, and about $6 billion in cash and marketable securities less $2.5 billion in total liabilities. If we assume that the value of the Yahoo! Japan investment has grown to $6 billion (it was estimated at a little over $4 billion last fall), then the core business is valued at about $9 billion. If quarterly EBITDA from that segment is over $300 million, then that makes for a valuation of 7.5x trailing EBITDA on the core business.

THIRD POINT

Billionaire Dan Loeb’s activist fund Third Point has been a major shareholder in Yahoo for some time, and had been agitating the company to replace its former CEO. We track quarterly 13F filings from hundreds of hedge funds, including Third Point, as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and can see from our database that Loeb had 62 million shares in his portfolio as of the end of March (find Loeb's favorite stocks). D.E. Shaw, managed by billionaire David Shaw, was another major shareholder with a position of 7.8 million shares (check out more stocks D.E. Shaw owned).

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