Yahoo!'s Core Problem

 | Jan 28, 2014 | 11:00 AM EST
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The last few days have done some damage to Yahoo! (YHOO) shares, falling from nearly $42 at the start of January to about $36.79 Monday.

Later today, the Internet pioneer will announce its fourth-quarter earnings. As usual, the sell side isn't expecting much. The consensus earnings estimate is $0.38 per share on revenue of $1.2 billion, which is a decline compared with previous quarters.

With the abrupt firing of COO Henrique De Castro over the holidays, it's very likely that Yahoo!'s display ads will greatly disappoint again. In fact, it would be a huge upside surprise if it weren't a complete disaster.

Investors will likely pay the most attention to the results of its Alibaba Group stake (from their third quarter, mind you) and Yahoo! Japan. Just two years ago, most people said Yahoo should have disposed of these Asian investments because it is not a hedge fund, and that sentiment is taking center stage in the upcoming earnings report.

In the core, any surprise is likely to come from the search segment. Yahoo! queries appear to be down again from a market-share perspective, according to outside sources, but they are likely up. And if Yahoo! has continued to do a better job of presenting results from search partner Microsoft (MSFT), there could be further improvement from past performances. Microsoft's own search results surprised to the upside last week, so it's conceivable that we'd see a surprise from Yahoo!.

But the bigger question is how much does the core really matter to Yahoo!'s stock price these days. I argued a few weeks ago that I believe it accounts for about 15% of the stock price movement on a given day. It's vastly overshadowed by Alibaba and, to a much lesser extent, Yahoo! Japan.

So, even though the media will spend a lot of time discussing the results of the core and on how CEO Marissa Mayer and CFO Ken Goldman look on their video version of their earnings report, investors seem to have dramatically reduced how much weight they put on these results in how the stock trades the next day.

There might be an exaggerated move in after-hours trading if the core results are particularly bad but as long as Alibaba results continue to do well, the stock should be stable when it starts trading tomorrow. So, how's this for an earnings preview: Just read the Alibaba slide results.

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