Yahoo! Is Down, Not Out

 | Jun 20, 2014 | 3:00 PM EDT
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After a big run in 2013 and the latter part of 2012, Yahoo! (YHOO) has been a stock laggard this year. It is down 15% on the year, while the market has been positive.

Even though Alibaba has filed its IPO document with the SEC and is expecting to go public in early August, Yahoo!'s stock has been stuck in neutral.

First, let's discuss why the stock has dropped from the low $40s and has yet to show signs of life:

  1. People are worried that the core business of Yahoo! is weak and getting weaker. The markets seemed spooked by Yahoo!'s Q4 earnings delivered in January. For the first time since Marissa Mayer was hired as CEO, investors (and talking heads) started to question her effectiveness as a leader. People started to openly doubt that she would be able to turn the company around and even started asking questions about how much longer her board would give her to fix things. The April earnings report didn't really help much either.
  2. People are worried that Mayer will waste the new cash influx from the upcoming Alibaba stake sale as part of their IPO on value-destroying acquisitions.
  3. The most recent Alibaba IPO filing update included their Q1 revenue information and Wall Street got worried that it wasn't growing fast enough. When you have juggernaut Internet companies -- whether it is Alibaba, Facebook (FB), or Twitter (TWTR) -- Wall Street always wants to see accelerating growth to justify the already high valuation.  Companies always want you to look at their year-over-year growth, but Wall Street has come to look at their quarter-over-quarter growth instead. If they don't see accelerating quarterly growth, they assume that this is a canary-in-the-coalmine sign that the business is slowing down and that the stock should be sold. Alibaba did show a deceleration in its revenue and profit growth from Q4 (their biggest quarter of the year) to Q1.

Are these concerns justified? Probably not, but sometimes the market is simply looking for any excuse it can hang its hat on to sell off (or go up). And this feels like the case here with Yahoo! after the stock has had a nice run for a year and a half.

Mayer is not going anywhere. It is her hand-picked board that is overseeing her performance and they are not eager to fire her. Besides, anyone close to Yahoo! knows just how neglected the company was for so long. This is not a quick flip. This is a serious fixer-upper that will take years to pull off.

Will she blow the money? Well, nothing good is assumed in the current stock price. Basically, investors are assuming that whatever she buys will not contribute much to Yahoo!'s bottom line.  Of course, that allows for upside surprises to the stock.

In terms of the Alibaba slowdown, we've seen this movie before. About six months ago, when Yahoo! reported its Q4 results, it also reported Alibaba's Q3 results -- and the market got upset about the numbers. We got the same gnashing of teeth over the deceleration that seemed to occur in Alibaba's business from Q2 to Q3. However, this Q3 result was followed up by blockbuster Alibaba results for Q4 (their biggest quarter of the year historically).

The point is that Alibaba's business -- especially at this size -- is lumpy. You can't draw too many hard and fast conclusions about one particular quarter's results -- especially if Alibaba is investing a lot in the business. You have to judge it over one year and compare it to the last. By that score, Alibaba is still a juggernaut.

So I'm expecting that Yahoo!'s shares will start to move up after the Alibaba IPO (if not before during the IPO roadshow). There will certainly be some fireworks in the fall, when Yahoo! spends some money on some big acquisitions. I'm also expecting some tax savings ideas for how Yahoo! might unwind their Yahoo! Japan stake and possibly some of their remaining Alibaba stake.

Don't go to sleep on Yahoo!.

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