Why Yahoo! Inc. (YHOO) Shares Netted Big Gains

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

What: Shares of search engine Yahoo! Inc. (NASDAQ:YHOO) vaulted higher by as much as 11% after the company posted a better-than-expected second-quarter profit.

So what: Unfortunately for investors, today’s earnings report isn’t as cut-and-dried as “Yahoo! beats.” In fact, it was a very mixed report, with Yahoo! Inc. (NASDAQ:YHOO)’s core ad business falling yet again, all while digital ad sales are growing in the U.S. by double digits. For the quarter, Yahoo! reported a slight drop in revenue to $1.07 billion, which was below the Street’s expectations, but delivered 46% net income growth from cost-cutting measures that drove adjusted EPS to $0.35, $0.05 better than expected. On the downside, Yahoo! Inc. (NASDAQ:YHOO) also lowered its full-year revenue forecast to a range of $4.45 billion to $4.55 billion from its previous forecast that called for $4.5 billion to $4.6 billion in revenue.

Now what: The real driver appears to be the strong growth at Alibaba, of which Yahoo! still holds a 24% stake. Expected to IPO sometime in 2014, some analysts have boosted their perceived valued of Alibaba to as high as $120 billion, which would translate into nearly $30 billion in value for Yahoo! Inc. (NASDAQ:YHOO) In the meantime, Yahoo!’s ad business is continuing its downward spiral despite CEO Marissa Mayer’s best efforts to make small, but earnings accretive, acquisitions. Despite the promise that Alibaba is showing, I have to question whether Yahoo! Inc. (NASDAQ:YHOO) has anything left in the tank other than its Alibaba investment. As of now, I wouldn’t say I’m all too impressed.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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