- A turnaround in Yahoo's core business doesn't seem to be on the horizon.
- Greater participation from activist investors could also become a problem.
- Yahoo seems poised for a worse year going into 2016.
Yahoo stock has continued to fall this year, losing over 35% of its value in the year gone by, and the fall looks likely to continue. It is a well-known fact that in recent years, Yahoo (NASDAQ:YHOO), the once mighty torchbearer of modern tech companies has been reduced to a proxy for its investments. Yahoo’s core business has lost both value and money, with huge competition in nearly all of its businesses. Now with all the speculation surrounding the company, the potential spin-off of the core business, how should you approach Yahoo stock in 2016? Alex Xu of Investary Group thinks your best bet, is to stay away from Yahoo stock.
Yahoo’s core business is valued at almost nothing, as was recently highlighted in Starboard’s letter to Yahoo’s management. Almost all of Yahoo stock valuations are derived from the company’s investments in Yahoo Japan and Alibaba. Yahoo’s earnings numbers are losing steam. Yahoo’s EPS has dwindled to nearly a quarter of what it used to be a couple of years ago, falling to an estimated $0.12 per share, from $0.40 per share.
Alex thinks that the loss of value is the result of a distracted management, which is trying to figure out what to do with its stake in Alibaba, rather than focusing solely on how it can improve its core business. There have been talks of spinning off the Alibaba stake, but those talks have now been shelved, partly due to the potential tax implications of such a move. Yahoo has instead been mulling a spin-off of its core business. Yahoo’s platforms have not been gaining users, and its acquisition of Tumblr at more than $1 billion, continues to lose money for the company. In Yahoo's video content business as well, the story has been similar. Yahoo recently wrote off a $40 million in video content pertaining to a series called Community. On the whole, Alex feels that Yahoo’s media strategy hasn’t really worked for them, much like its attempts in the online search industry. Further, Yahoo’s display ad revenue has also been on the decline, to make matters worse.
Alex thinks that for Yahoo stock to gain from here, the company will either have to spin-of the core business, or replace Marissa Mayer at the top of the organization. Yahoo needs to step up its acquisitions strategy and find a way to fix issues with its core business. Yahoo is still one of the most visited websites on the internet. However, these numbers are showing a declining trend, and this needs to be fixed. One of the options for Yahoo is something the company hasn’t done, which is to start supplementary businesses. One of the options here is for Yahoo to operate a social media business. This again has become exceedingly competitive.
Now becoming a prime target for activist investors who might want Yahoo to do other things which its management doesn’t plan to do right now, Yahoo is a bad investment option. From areas like cash utilization and return, to acquisitions, if Yahoo’s management and some of its investors fail to see eye to eye, Yahoo stock could continue to go nowhere but down, like it has in the last twelve months.
Alex predicts that this is likely to continue in 2016, with no major positive triggers in sight to lift Yahoo stock. Alex believes that Google is a better investment option for investors at the moment.