Yahoo (NASDAQ:YHOO) has been among the most happening companies of 2013, be it as acquirer of many innovative start-ups, or as a stock making significant advances. Ever since Marissa Mayer took over, lady luck seems to be working for the Silicon Valley based technology giant. So, what exactly has fueled this positive sentiment towards a company considered to be a dinosaur from the bygone internet era.
In our earlier coverage of Yahoo stock valuation (Sep 26, 2013), we had highlighted the huge upside the stock had mainly on account of its investments in Alibaba and Yahoo Japan. Our intrinsic value estimate of Yahoo back then was $40 - $42 range, a range the stock currently trades in. The analysis back then was based on the then numbers of Alibaba and Yahoo Japan, both of which have made significant advances in valuation since then. A lot has been said by a number of authors with regard to their upped estimates on account of increases in the value of Yahoo’s two golden investments. The focus on these investments has been such that Yahoo has begun to look like a holding company with nothing said of its advertising segment, which apparently happens to be its core business. However the segment has seen a lot of changes, and today we will focus on the company’s hitherto understated segment, ‘Advertising’. Could that be the next value driver for the company’s stockholders?
So where do we start, as today we seem to have lost track of this segment. How about starting at the International Consumer electronics show 2014, an event which recently was held at Las Vegas? We believe the biggest positives of Yahoo’s core business were highlighted in the keynote address by CEO Marissa Mayer. Looks like we are at the culmination of what has been a work in progress for almost two years now. Yahoo’s entire shopping spree of swallowing up 31 targets was just a part of a bigger plan, a plan aimed at driving advertising revenues and restarting Yahoo’s core business.
Let us now try and recollect some of Yahoo’s latest launches and see where it all leads to. The company came out with launches such as Yahoo Screen, Yahoo Tech, Yahoo smart TV, Yahoo news digest with android app Aviate on the launch pad, currently in the beta stage. The one evident thread common through these launches has been to go mobile and to personalize. Personalization leads to better user understanding, which leads to better targeting of advertisements. User targeting is the holy grail for any online media company. Google of course leads the pack where users come and tell what exactly they are looking for while most others like Yahoo need to figure that out!
Mayer seems to be spot on with her strategy, combining personalization with mobile, a combination which recognizes the shift of users from PC’s to mobiles. The endpoint of increased advertising dollars, which is not yet reached, seems clearer than ever before. Come 2015, when Yahoo’s turnaround could well be complete and Google and Facebook will have to work harder than before to continue earning their dollars.
We update our Yahoo valuation using a sum of the parts approach, looking at the three parts: Alibaba stake, Yahoo Japan stake and value of the core business of advertising, which drive Yahoo’s valuation.
Yahoo’s Alibaba stake
We had stated our assumptions for Alibaba stake calculations in our earlier article. Our earlier estimate put the value of Alibaba in the range of $75 – $ 90 billion. We shall today estimate the likely value of Yahoo’s stake at various valuation levels of Alibaba. The chart below shows our estimates of the per share value of Yahoo’s Alibaba stake.
Alibaba Stake Value
|Yahoo current stake||18||24||30||36||42||48|
|Yahoo post IPO stake (60% of stake)||10.8||14.4||18||21.6||25.2||28.8|
|Cash at IPO (40% of stake)||7.2||9.6||12||14.4||16.8||19.2|
|After tax cash at IPO (35% tax rate)||4.68||6.24||7.80||9.36||10.92||12.48|
|Total value of Alibaba stake||15.48||20.64||25.80||30.96||36.12||41.28|
|Per share value of Alibaba stake ($)||15.33||20.44||25.54||30.65||35.76||40.87|
|Yahoo current number of shares (in billions)||1.01||1.01||1.01||1.01||1.01||1.01|
|Average per share value of Alibaba stake ($)||28.10|
Note: All numbers in billions of USD, except per share value.
The average per share estimate is got by estimating the per share value for different levels of the estimate. It would be worth mentioning that a report by Bloomberg had pegged Alibaba to reach a valuation of $200 billion by end of 2014. However, our average estimate lies closer to $125 - $150 billion, which is close to the average market estimate.
Yahoo Japan stake
We shall now move on to the other large investment of Yahoo Inc., its 35% stake in Yahoo Japan. The chart below shows our updated estimated value of Yahoo Japan.
Yahoo Japan Stake Value
|Value of Yahoo Japan (billions)||3,820||36.39|
|Value of Yahoo stake at 35% (billions)||1,337||12.74|
|Per share value||1,323.76||12.61|
|JPY/USD (Jan 10, 2014 exchange rate)||104.98|
Our estimates are based on the current exchange rate of 1USD = 104.98 JPY and the Jan 10th closing price of Yahoo Japan. The total per share value of Yahoo Inc.’s equity interests is $ 40.71 ($28.10 + $12.61).
Yahoo’s core business: Advertising segment
We now move on to Yahoo’s core business valuation, which we believe is on a turnaround path. While the numbers are yet to show up, the Yahoo properties seem to be attracting users, which is a first sign of the coming turnaround. According to a comScore report, Yahoo sites, at 194 million, had the highest number of monthly unique visitors in the month of November, going marginally ahead of Google properties at 192 million. The report is only based on US users, but is a fair indicator that Yahoo is beginning to draw users back to its sites. As the users get back on Yahoo properties, the advertising revenues will be back on track sooner than later.
The chart below displays the valuation multiples of the other prominent competitors to Yahoo.
|Market Cap: Jan 09, 2014 closing price (in billions of $)||3,590||377,600||139,350||13,770|
|LTM Revenues (in billions of $)||2,240.4||57,386||6,872||1,144.8|
|LTM Earnings (in billions of $)||92.1||12,430||1,041||403.5|
|LTM P/S ratio||1.60||6.58||20.28||12.03||10.12|
|LTM P/E ratio||38.98||30.38||133.86||34.13||59.34|
Inspite of the expected improvement in the advertising revenues of Yahoo, we will value Yahoo at the price-to-sales multiple of AOL, which has seen a constant decline in advertising revenues. However, we are confident that Yahoo will see multiple expansion as its acquisition strategy begins to pay off over the coming quarters, as was hinted by the CEO in her keynote address at the International Consumer electronics show 2014
|Revenue (in billions of $)||1,345.81||1,140.37||1,135.24||1,138.97||4,760.39|
|Yahoo Ad segment value (in billions of $)||7,616.624|
|per share value ($)||7.54|
Yahoo Intrinsic Value: Aggregating the parts
We now aggregate the value of the various individual parts to arrive at the total expected/intrinsic value per share of Yahoo. Our conservative estimated intrinsic value of Yahoo stands at $48.25 ($28.10 + $12.61 +$7.54), which represents an upside of 17.9% over the last closing price (Jan 9th) of Yahoo stock.
To see the current stock price of Yahoo click here: (NASDAQ:YHOO)