Is Yahoo Inc (YHOO) A Good Stock to Buy Post Alibaba Deal?

Is yahoo a good stock to buyYahoo! Inc. (NASDAQ:YHOO) announced on Tuesday that it will be returning $3.6 billion of the $4.3 billion proceeds from the sale of its stake in Alibaba Group Holdings Limited, the company that owns Alibaba.com Limited (HKG:1688). Alibaba, which services Asian countries like China and Japan with a variety of commerce and retail websites, reports that it has completed about half of its repurchase of Yahoo’s 40 percent stake in the company. Stagnant throughout most of 2012, Yahoo shares are up 8 percent this month. Over the past year, activist hedge fund manager Dan Loeb has been guiding the company through a management restructuring, and he added to his stake in Yahoo in July (view his portfolio here).

The company initially purchased its stake in Alibaba for $1 billion in 2005 to attempt to play the upward secular trends in internet usage in Asia. The distribution of proceeds to shareholders assuages anxieties from JP Morgan and Barclays analysts stemming from CEO Marissa Mayer’s reevaluation of the company’s “planned capital allocation strategy” noted in an SEC filing. Acquisitions and investment in core operations were considered more likely uses of the proceeds, so Yahoo investors are happy to see the after-tax proceeds coming their way.

Yahoo is having trouble coming up with a competitive mobile solution. Though Yahoo is known as a content aggregator and media source, Stifel Nicolaus analyst Jordan Rohan indicates that the company might adopt a platform-based strategy. While this would attract developers and innovation back to Yahoo, Rohan notes that “this implies lower margins.” Baidu.com, Inc. (NASDAQ:BIDU) and Yandex NV (NASDAQ:YNDX), which provide similarly sundried internet services in Asia, have net profit margins of 46 percent and 29 percent, respectively. Yahoo’s trailing net profit margin stands at around 11 percent, which is also in the low range for the internet technologies sector. Profitability issues are a forefront concern for any move that would steer Yahoo toward a development phase, and therefore, tighter margins.

Acquisitions still stand as a rapid way of expanding Yahoo’s offerings and building competitive advantage. Foursquare and Yelp Inc (NYSE:YELP) are often suggested at candidates, though Mayer seems wise to back away from these expensive companies that would, in all likelihood, only incrementally improve Yahoo’s core business. As we mentioned previously, Yahoo’s vision of an internet made accessible by content aggregators never really came to fruition, and it is still trying to compete with Google Inc (NASDAQ:GOOG) over search market share. Yahoo’s search ad revenue was up 4 percent in the second quarter 2012.

Yahoo shares are trading at 13.5 times forward earnings, which is in the lower range of the tech sector and below the P/Es of Baidu.com, Inc. and Yandex NV. However, when growth projections are taken into account, Yahoo shares are slightly less appealing. The PEG (price/earnings to growth, lower is better) for Yahoo is 1.2, whereas both Baidu and Yandex both come in at below 0.8. This means that Yahoo’s shares are trading at a lower P/E multiple largely because investors are skeptical about the speediness of a turnaround, if one ever comes. Rohan’s sum-of-parts valuation of Yahoo includes a 20 percent discount “due to execution risk and the time value associated.” The only way for Yahoo to earn a higher multiple is to find its catalysts for growth.

Since mid-2007, Yahoo has had seven total CEOs (including interims). The company’s intellectual property and store of patents remain an ongoing asset. We agree with a number of analysts that Yahoo’s best growth opportunities lie in international expansion and in developing in markets not already monopolized by the giants of the tech world.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!