In the wake of the ongoing tech rage in the smartphone segment one sector which has not enjoyed the spotlight for quite some time is the web portal business. Due to the festive shopping frenzy the major focus has been on consumer driven companies like Apple (AAPL, Financial), Samsung (SSNLF, Financial), Amazon (AMZN, Financial), and Walmart (WMT, Financial) and so on and so forth. However one company that should be talked about from a wise investment perspective is Yahoo! (YHOO, Financial) more so due to its ominous participation in the latest blockbuster company Alibaba (BABA, Financial). In the face of stiff competition where most of the web portal business is seeing a takeover spree, Yahoo! has managed to uphold its identity tall with its wise strategic financial placements.
Though it is currently quite undervalued, it has a lot of gas left to pump its way up the charts. Let us take a look at how it can pan upwards.
Yahoo!’s current stats
According to market reports, there are numerous catalysts driving Yahoo! higher. One of them is obviously its investment stake in the current IPO hero Alibaba .One of the Yahoo! analyst was quoted as saying in one of his analysis: “Going forward, I'm highly confident that the impact from investment into its core business and the impact from share buybacks will materially boost earnings and will drive the stock price to my $48.63 price target.”
A few reasons to count on the pending uptrend in Yahoo! is chiefly due to the fact that the stock is currently trading at quite an undervalued price tag coupled with it underlying upside in the Alibaba investment stake, solid monetization prospects from mobile routes and expansion of the capital return program. Also the recent appreciation in the valuation of Alibaba should drive Yahoo! higher.
Yahoo!'s core business also has decent upside prospects as the company has modified its business away from desktop to mobile ads by targeting native advertising in keeping with the current trend of internet usage on mobile devices. Yahoo! is also actively widening its service spread by building out a real-time bidding platform more commonly referred as self-serve by the market. These efforts, along with yield from its biggest success of the year – Alibaba, put Yahoo! in a position from where rapid up scaling of its earnings is not a difficult task.
Digital Advertising is a segment which is difficult to quantify and going by the management guidance the number yield from banner ads is on the down ride however Yahoo! is rapidly gaining grounds in the mobile internet segment and working its way up to the existing honchos in this arena – Google (GOOG, Financial) and Facebook (FB, Financial). The ARPU for Yahoo! in the niche sector of mobile internet is also worth considering while calculating its growth equations.
This introduces the possibility of various web-based media properties co-existing at various levels of scale and do not require aggregation of the highest amount of viewership. Though going by common practice greater scale improves pricing, but properties that operate at different subscale levels can add compelling engagement statistics, so long as they can optimize various aspects of the platform to optimize targeting, placement and appearance of ads.
Effect of the ongoing functions
Summing up its overall business functionalities – Yahoo!'s equity stake in Alibaba and Yahoo! Japan combined are worth significantly much higher than its current trading levels. Yahoo! Japan's market capitalization stand at $20.45 billion going by the current exchange rates and Alibaba’s market capitalization is pegged at $285 billion. Yahoo! holds 36% and 15% stakes, respectively. When applying Yahoo!'s equity stake on both stocks, at current market valuations, its equity interest works out to $50.2 billion. Yahoo!'s equity, after subtracting the impact from its ownership interest in various equities, comes to $9.65 billion. Hence Yahoo!'s current tangible value works out to be approximately $60 billion before taxes. However, after deducting the income tax on its equity interest of $50.2 billion, Yahoo! holds $42.28 billion in actual tangible value, which is still above proportion in comparison to its current stock price.
Obviously, Yahoo!’s core business would anyways be significantly higher than $9.65 billion. Going by the common market examples of various ad-driven business models such as Twitter (TWTR, Financial), Facebook, LinkedIn (LNKD), and Google trade at 5 to 22 times of its sales numbers. Even if we value Yahoo!'s core business at the lowest point of the range, it would be have a value of $23.4 billion.
After coupling the yield from its core business and post-tax proceeds of its equity interest holdings Yahoo! should hold a total value of around $56 billion. Hence we can always expect Yahoo! to hit trading numbers of around $57 per share in the near term which means an upside of 16.54% yet to go, considering the current stock prices of $48.91 per share.
Final take
Yahoo! should be a good bet to add to your portfolio to reap the benefits of a rapid upside probability in the near short term. Until now in most of our analysis with GuruFocus, we have offered insight of stocks with long term upside potential. However a stock like Yahoo! would give your portfolio the agility of getting quick returns which can prove to be a quick sweetener in your otherwise long term strong portfolio. For now it would be best to utilize the undervalued trading levels of Yahoo! and buy in a good number of positions in the company to get a good return in the short span of around four to six months by our calculations.
