Don't Buy Yahoo Quite Yet
It finally happened. Yahoo (YHOO) has announced that Jerry Yang will be stepping down as CEO/Chief Value Destroyer of the company he created. Kara Swisher at All Things Digital first broke the news here.
The welcome news was met with a surge in YHOO’s stock price yesterday. At last check, the stock was up more than 6.8% on the day, to $11.55.
Yahoo has been cheap on a valuation basis for quite a while, with investors sitting on the sidelines due to the obvious conflicts between Yang’s personal interests/pride and management’s stated goal of creating long-term shareholder value. Yahoo’s intraday stock price implies an enterprise value of $11,615.6 million. Wall Street consensus estimates of $1,852.7 million in 2008 EBITDA and $2,062.1 million in 2009 EBITDA mean that the company is trading at 6.3x 2008 EBITDA and 5.6x 2009 EBITDA. As one would expect from a mature Internet business, the company is quite capital efficient - in fact, the company trades at just 7.7x LTM FCF. (Note: Estimates will likely decrease over the coming months)
YHOO’s balance sheet is also strong, with $3.2 billion in cash and short-term investments, no long-term debt, and only $63 million in capital lease obligations. The company also owns a $1.4 billion stake in China’s Alibaba.com.
However, Yahoo is the clear #2 in the U.S. search game while consistently losing share to Google (GOOG) – and should continue to do so as it lags behind Google’s continuous innovation in this regard (Chrome, Android, etc.). As search becomes even more of a primary navigation tool, Yahoo runs a real risk of losing its edge on the media side as Google diversifies away from its core business (Gmail, Orkut, Google Finance, etc.) and continues to encroach on Yahoo’s territory. Today, Yahoo enjoys a dominant position in many media-focused online verticals, including Communications and Finance. These properties play a large role in Yahoo’s lead in the online display advertising market, but if the company is unable to control more of the Internet “infrastructure” and navigation tools this may eventually evaporate.
The weak online advertising market should be both a positive and negative for YHOO. On one hand, Yahoo will be able to put its big bank account to work with cheap share buybacks or strategic acquisitions at better prices (LinkedIn, Kayak, RockYou! and AdMob would all make lots of sense). On the other hand, financial performance will be weak and should limit their ability to innovate, retain key employees, expand the sales force and drive shareholder value.
Then, there is still the question of who will take the reins as CEO. Expect a comprehensive search as the disenchanted board cannot afford to make another wrong decision. Demand for the job should be reasonably high given the difficult technology environment and the relative lack of attractive startup executive positions. I expect the eventual Yang successor to be an experienced Internet exec with a strong track record of operations efficiency – either a current Google or ex-Yahoo employee. If this process is run correctly (a big “if” considering the company’s track record), the firm could be on the right track again within 24 months.
Despite severe operating and financial missteps, Yahoo remains one of the few Internet properties of scale. It holds dominant positions in many key strategic verticals, including display advertising, messaging and online media. These assets, combined with a strong operating CEO and a rediscovered culture of innovation should allow Yahoo to return to the upper echelon of technology businesses, but the process will take a long time.
For now, Yahoo is a struggling, directionless company without a CEO. While the valuation is cheap, it is more than justified by external and internal factors. My advice is to stay on the sidelines and wait for this big battleship to right itself before jumping in to such an opaque situation.
Disclosure: no positions
Related Articles
|
Top Rated Comment Streams:
-
1.Hedged In661
- 2.
-
3.Smarty_Pants402
-
4.cos1000295
-
5.axelrod608291
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright
This article has 1 comment:
-
kurt walter
-
409 Comments
Nov 19 05:27 PM