One of the world’s largest internet companies, Yahoo! Inc. (NASDAQ:YHOO) has made some pretty savvy business moves over the past few years and it appears that their revenue is finally stabilizing. At first glance, Yahoo! appears to be a bit expensive, especially after the 75% gains so far this year. However, upon a closer inspection, I don’t believe this to be the case.
The current state of Yahoo!
Yahoo! Inc. (NASDAQ:YHOO), which was the internet’s top search destination until Google Inc (NASDAQ:GOOG) came into the picture, divides its business into four categories. Yahoo!.com includes the search, news, sports, and finance businesses, to name a few. Communications includes Yahoo!’s mail and messenger services, User-Generated Content includes groups, Yahoo! Answers, and Flickr, and Mobile & Emerging Products includes IntoNow and Connected TV. Yahoo! also has significant stakes in several Asian internet operations, which we’ll look at in more detail in a bit.
Having been through seven CEO’s in the past six years, it appears they have finally found one that is prepared to take the company back to its glory days in Marissa Mayer, who has already shaken things up at the company since taking the reins last year. One of her primary goals seems to be to change the culture at Yahoo! to catch up with other Silicon Valley companies.
In a move that was controversial amongst those involved, Mayer mandated that all employees who were working from home needed to either come work in the offices or quit. I applaud this decision as part of her plan to make Yahoo! Inc. (NASDAQ:YHOO) a more “collaborative business,” as it the case at companies like Google and Facebook Inc (NASDAQ:FB), where work-from-home arrangements are not very common. However, Mayer has upped the level of benefits employees receive in the office to be more on par with other similar companies, including free food, free phones, and a very generous maternity (and paternity) leave policy that was recently enacted.
The Microsoft deal and the state of the search business
In 2009, Yahoo! Inc. (NASDAQ:YHOO) announced a search/advertising pact with Microsoft Corporation (NASDAQ:MSFT), effectively outsourcing the company’s search business to Microsoft and their new (at the time) Bing search platform. Apparently this deal isn’t working out as well as Yahoo! had hoped, and the Wall Street Journal recently reported that Yahoo! has been trying to find a way out of the deal, as Yahoo!’s revenue per search is actually worse under the deal than it was before. Google Inc (NASDAQ:GOOG) has expressed its interest in forming a more lucrative partnership with Yahoo! Inc. (NASDAQ:YHOO), but it is unlikely that Yahoo! will get out of its agreement with Microsoft before 2015, which is the first point in the contract they could opt out.
Google may be more receptive to a deal than last time the two companies discussed the possibility in 2008. As of the latest data available, Google is slowly losing ground in the search business to Bing and Yahoo!. Google accounted for 66.5% of the search traffic in April, down 0.6% from the month before. Microsoft Corporation (NASDAQ:MSFT) (which broke the 17% level for the first time) and Yahoo! combined for a 0.6% gain, indicating that search traffic is slowly leaving Google and migrating toward the other two.
Asian investments
One part of Yahoo! Inc. (NASDAQ:YHOO)’s business that offers tremendous growth potential in the future is the company’s Asian investments, particularly the company’s 24% stake in Alibaba Group, a Chinese family of internet businesses specializing in e-commerce. Last year, Alibaba handled about $170 billion in e-commerce sales, more than eBay Inc (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) combined, producing over $4 billion in revenue. Alibaba is expected to announce details of its IPO in the near future, and its valuation has been estimated to be between $55 billion and $120 billion (meaning Yahoo!’s stake would be worth between $13.2 billion and $28.8 billion).
Recent developments: Tumblr and more
Yahoo! is in the process of acquiring Tumblr for $1.1 billion, which I think could be worth many times that to Yahoo! in the long run. Tumblr is a microblogging platform and social networking site, which has 300 million monthly unique visitors, over half of which connect via mobile devices. Virtually every major tech company has identified that monetizing their mobile offerings is essential to success, but no one has gotten it quite right yet. Yahoo! doesn’t seem to be slowing down their ambitious growth as a result of this acquisition either…multiple sources have been reporting the company to be in talks to acquire Hulu, the online television hub.
The numbers game
While Yahoo! Inc. (NASDAQ:YHOO) trades at about 19.2 times the current fiscal year’s projected earnings, this is not a valid representation of the true value of Yahoo!’s assets. Yahoo! has about $4.2 billion in cash and no debt whatsoever on its balance sheet, and assuming Alibaba prices in the middle of the previously stated range, Yahoo!’s stake would be worth about $21 billion, of which Alibaba has the right to buy back half at whatever the IPO prices for, a right they will undoubtedly execute.
Add to this the 35% stake in Yahoo! Japan, worth about $9.7 billion at the current share price, and Yahoo!’s cash and investments total $34.9 billion (once Alibaba goes public), which translates to $31.69 per share. In other words, the value of Yahoo!’s Asian investments plus cash is more than 17% higher than the current share price.
Once the terms of the Alibaba IPO come out, Yahoo! may be worth the price of admission on that news alone. Additionally, I think their Tumblr acquisition will move the company to the next level in the mobile ad business. Regardless of what happens with their search deal, Yahoo! is certainly on the right track and an absolute bargain at the current price.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article The Best Internet Company for Your Portfolio…It’s Not What You Think! originally appeared on Fool.com and is written by Matthew Frankel.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
