In this article, let's take a look at Yahoo! Inc. (YHOO, Financial), a $41.68 billion market cap company, which provides search and display advertising services on Yahoo properties and affiliate sites worldwide.
Some Possible Answers
Yahoo! Inc.'s longer-term drivers are well-known, and citing one we can highlight its large base of millions of users, which constitutes an almost unparalleled competitive advantage.
Turning our attention to the company´s risks, we must mention that users and advertisers are spending more time on other websites, one of the favorites is Facebook Inc (FB, Financial). This is important because the company is losing market share in the online advertising segment. Moreover, Yahoo Sports and Yahoo Finance should have better fit in the mobile applications.
The company focuses on profitability and that´s the reason why it cut costs and some operations. The giant is shutting down its China offices that will also include the elimination of labor force.
Revenues and EPS
Looking at profitability, revenues declined by 1.01% in the last quarter compared to the same quarter one year before. Also, earnings per share (EPS) decreased in the most recent quarter ($0.17 vs $0.33).
Net Income
The net income sharply decreased in the fourth quarter of fiscal 2014 when compared to the same quarter one year prior ($166.34 million vs $348.19 million).
Margins and Liquidity
The gross profit margin is considered very high, at 84% and it has increased from the same quarter the previous year. Further, net margin is ranked higher than 99% of the 487 Companies in the Global Internet Content & Information industry.
The company has a quick ratio of 2.14, which demonstrates the ability of the company to cover short-term liquidity needs.
Profitability
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| YHOO | Yahoo | 32.95 |
| EBAY | EBAY | 0.23 |
| BIDU | BAIDU | 29.47 |
| FB | 13.63 | |
| Â | Industry Median | 6.09 |
The company has a current ROE of 32.95% which is higher than the industry median and the one exhibit by EBAY (EBAY, Financial) and Facebook. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Baidu (BIDU, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 6.1x, trading at a discount compared to an average of 100.8x for the industry. To use another metric, its price-to-book ratio of 1.1x indicates a discount versus the industry average of 3.67x while the price-to-sales ratio of 9.72x is above the industry average of 3.66x.
Final Comment
The company has a good ROE, as well a good valuation levels. We saw good profit margins and increase in stock price during the past year. Although earning´s growth slowdown in the last time, I feel bullish on this internet stock.
Hedge fund gurus like David Einhorn (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Steven Romick (Trades, Portfolio) and Jim Simons (Trades, Portfolio) bought the stock, while Steven Cohen (Trades, Portfolio) and the funds PRIMECAP Management (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Caxton Associates (Trades, Portfolio), RS Investment Management (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio) have taken long positions in the fourth quarter of 2014.
Disclosure: As of this writing, Omar Venerio did not hold a position in any of the aforementioned stocks
