Yahoo! Inc. (NASDAQ:YHOO) has an impressive portfolio of web-based search and advertising services. The former continues to face robust pressure from Google and Microsoft, but we believe that Yahoo presents investors with an impressive turnaround play. Billionaire David Einhorn was taking a new stake in Yahoo last quarter (see David Einhorn's newest picks).
Obviously, Yahoo's key play is in the online advertising market, which remains one of the most attractive growth segments of the economy. Helping Yahoo capture more search traffic is its transition into content, having agreements with CNBC, NBC and ABC. It is hoped that video content specifically will give a nice traffic boost to the company. Yahoo has also been hedging its deteriorating display ad revenues by tapping into the mobile segment more heavily.
To help refocus on search, e-mail and social networking, Yahoo has been selling off its non-core assets; this includes Yahoo's sale of HotJobs to Monster.com in 2010. Yahoo has also been focusing on monetizing its Asian assets, including the recent sale of 43% of its stake in Alibaba for $7.1 billion. This cash is expected to go toward dividend boosts or share buybacks. The return on its Alibaba investment has been impressive, especially when considering it paid $1 billion for the entire stake in 2005. Assuming Alibaba can execute an expected 2015 IPO, Yahoo would be able to further monetize its remaining stake, likely seeing an even greater return on its original investment.
From a valuation standpoint, Yahoo trades well below its major tech peers. At 6x earnings, Yahoo is much cheaper than Google (22x), Microsoft (15x) and Comcast (17x). We are also encouraged by the search company’s long-term expected EPS growth rate, which comes in at an 11% CAGR.
Google Inc (NASDAQ:GOOG), meanwhile, also has a limited 5-year expected earnings growth rate of 13%. The Motorola acquisition has been putting pressure on the company, in part helping it to miss 3Q earnings by 15%. The move should still be long-term positive for Google given it couples the company's highly-popular Android mobile operating system with a hardware segment. Billionaire George Soros' was one of Google's biggest fans after adding the stock to his portfolio last quarter (check out George Soros' new picks).
AOL, Inc. (NYSE:AOL) offers global web services and provides online advertising solutions. AOL's business spans online content, products and services that the company offers to consumers. AOL also owns and operates various third-party websites and runs one of the largest Internet subscription services in the U.S. The tech company trades at an outrageously low P/E of 3x, but its forward P/E is upwards of 20x. Jim Simons upped his stake almost 50% last quarter (see Jim Simons' top picks).
What about Microsoft and Comcast?