Billionaire investor and manager of Third Point Dan Loeb has sold off 15% of his Yahoo! Inc. (NASDAQ:YHOO) stake over the past week. Loeb first initiated a position in Yahoo! Inc. (NASDAQ:YHOO). during the third quarter of 2011 by buying up 43 million shares. From there he led a successful effort to remove Yahoo! CEO Scott Thompson, and helped get current CEO Marissa Mayer appointed. By the end of 3Q 2012, Loeb and Third Point Capital owned over 78 million shares of Yahoo!, which was 23% of Loeb’s 13F portfolio. Loeb bought the majority of his shares at an average price of $14 per share; the stock now trades at $19.80, a solid return for a couple years work.
The question is, should investors follow Loeb out of Yahoo!? Since the end of the third quarter in 2011, Yahoo!’s stock is up 35% and now trades around $20, but is this fair value for the company? I think not. There is more room for the tech stock to move higher despite being at three-year highs (check out all the hedge funds in love with Yahoo!).
Part of what’s exciting about Yahoo! is its turnaround story, including a return to its money-making businesses, including mail and search, while dumping non-core assets. The sales are across the board, from HotJobs and Monster.com, and the partial sale of Alibaba, which pulled in some $7.6 billion and boosted the tech company’s cash on hand. The plan is to return $3.65 billion, or 85%, of the after-tax money brought in by the Alibaba sale to shareholders. There is also speculation that Alibaba might be looking to IPO in the next couple years, which would further unlock value for Yahoo! and its shareholders.
Yahoo! still gets over 40% of its revenues from search, where it competes with the likes of search leaders Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) . Google has long been the U.S. search market leader, currently owning over 65% of the market share. Microsoft is the number two in the U.S. search market, with 15% of the market share. Facebook Inc (NASDAQ:FB) has also recently decided to join the search game, while AOL, Inc. (NYSE:AOL) is still one of the smaller search players.
AOL was one of the compelling growth stories of 2012; could Yahoo! be the AOL of 2013? AOL embarked on a similar transition, selling off patents in 2012 to return proceeds to shareholders. Recent quarterly results showed AOL posting net income of $0.22 per share, versus the loss of $0.02 per share for the same quarter a year ago. The recent quarter also showed that AOL’s subscription revenue declined to its lowest point in six years. As far as the display ad market, Google and Facebook account for almost 30% of the total U.S. display ad revenue, and AOL owns only 4%, per eMarketer estimates. The research firm also estimates that the total U.S. display ad market will grow more than 20% in the coming year. This will be a solid growth opportunity for both AOL and Yahoo!, as Yahoo! generates around 30% of revenues from display ads.