Yahoo’s closest peers are Google Inc (NASDAQ:GOOG) and AOL, Inc. (NYSE:AOL). The forward valuations of these two stocks are in the 17-20 range, so in that sense Yahoo! Inc. (NASDAQ:YHOO) appears to be priced about in line with its peers. Of course, Google has a strong brand name and has been growing its business particularly through its strength in search. Earnings were up 16% in its last quarterly report compared to the first quarter of 2012, and even though analyst expectations do take Google’s growth potential into account it certainly appears to be an interesting pick given that it is priced in line with these peers. AOL engaged in a major share buyback recently following the sale/lease of a patent portfolio, and combined with some growth in net income this has caused earnings per share to rise considerably. Still, we are skeptical that the company can sustain this growth in EPS by enough to justify a higher forward valuation than Google or Yahoo.
We can also compare Yahoo to Baidu.com, Inc. (ADR) (NASDAQ:BIDU) and to Microsoft Corporation (NASDAQ:MSFT), which has its own Internet portal initiatives and also cooperates with Yahoo! Inc. (NASDAQ:YHOO) in search. Baidu carries trailing and forward P/Es of 20 and 15, respectively, with analyst expectations beyond that point being high enough that the five-year PEG ratio is less than 1. We’d note that the stock is down 14% in the last year against a rising market, even as revenue and earnings have risen, likely on concerns over China. Microsoft is, in a sense, the cheapest of all of the stocks we’ve mentioned here at 12 times forward earnings estimates. However, we’d be concerned that some of these earnings will be temporary as consumers and businesses buy new versions of Windows and Office. We’re also interested in learning more about the company’s reorganization plans; we wouldn’t expect them to do much good but it is at least possible.
Baidu and Google are growing nicely and- if we stick to earnings multiples- appear to be at least as good values as Yahoo and certainly better buys than AOL. Of course, we’ve noted the sum-of-the-parts case for Yahoo! Inc. (NASDAQ:YHOO), and investors may want to explore that thesis in more detail.
Disclosure: I own no shares of any stocks mentioned in this article.