By Adil Yousuf
After replacing five CEOs in the past five years, it looks like Yahoo Inc. (YHOO) has finally made the right decision by appointing former Google VP Marissa Mayer to breathe new life into a portal that's been treading water for years. The company has been resurgent in the past few months and the stock has gained more than 40% since her appointment.
She has made some key resource changes, signalled a renewed interest in strategic smaller scale acquisitions, and has rescinded a very liberal telecommuting policy for the company. This internal transformation in the culture and execution of the business has been received well among employees and investors. The firm is showing improvements in earnings and revenues, and looks well-positioned to perform well in its new innings under her leadership.
For Q4 2012, Yahoo reported earnings that exceeded analyst estimates (actual: 32 cents per share vs. analyst: 28 cents per share) 1. Additionally, the company surpassed Q4 revenue expectations (actual: $1.22 billion vs. $1.21 billion), and reported revenue growth of 2% for the first time in 4 years. The company also made progress by signing key partnerships with NBC sports and CBS television, and launching mobile experiences for Yahoo mail and Flickr.
Going forward, Yahoo expects revenue between $1.07 billion to $1.1 billion for Q1 2013, slightly shy of street forecasts of $1.12 billion 2. However, the company believes it can accelerate revenue growth. With the recent stock repurchase 3 and the increased morale within the firm, the slightly weaker guidance is unlikely to shake the renewed investor confidence in the company. Additionally, investors are closely eyeing a potentially lucrative initial public offering of Alibaba that could help drive Yahoo's share price higher. Note, while Yahoo sold some of its interest in the Chinese e-commerce company last year it still owns a 24% stake in the firm 4.
Based on Market IQ's proprietary Fundamental metrics, Yahoo is expected to outperform its peer group. Market IQ places Yahoo in the top right quadrant of the Quality-Value chart (see below), indicating high Quality and Investment Value.
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The company's Qualitative strength can be seen in multiple areas, such as its sustainable growth rate, return on equity (ROE) and Financial Strength.
- Yahoo has a sustainable growth rate of 28.15% which is significantly higher than the industry average of 16.5%
- The company's current ROE greatly increased when compared to its ROE from the same quarter one year prior 5. This is a signal of significant strength within the corporation.
- With no long term debt on its balance sheet Yahoo's leverage ratios indicate the company's sound financial standing in its peer group 6.
Among internet companies, Yahoo is attractively priced and offers compelling valuation metrics. Yahoo is currently trading at a Price-to-Earnings (P/E) multiple of 19.38 and a Price-to-Cash Flow (P/CF) multiple of 5.27. Both these multiples are relatively lower compared to its peers, indicating better investment Value associated with Yahoo.
Along with strong fundamentals, sentiment analysis for Yahoo also reveals a bullish picture. Spikes in Market IQ's Sentiment metric have perfectly correlated with positive movements in Yahoo's price. The chart below, which overlays Buzz, Sentiment, and price for Yahoo over the past six months shows how Social Sentiment has dictated the directional change in Yahoo's stock price post Marissa Mayer's first earnings call on October 22, 2012.
Given all the positivity surrounding the firm, one must ask if it is a good time to invest in Yahoo. Though the company is headed in the right direction, it still faces headwinds in monetizing revenue from the mobile business - this is likely to be the biggest challenge for Mayer and will be the ultimate measure of her success.
While the company's improving fundamentals and plans for future growth are encouraging indicators, greater challenges lie ahead as the firm attempts to compete against giants like Google (GOOG) and Facebook (FB) that have completely revolutionized the digital landscape. Yahoo is unlikely to regain its once dominant position as an internet powerhouse any time soon, but recent turnaround indicates that the web portal is capable of steady, if not spectacular, growth.
5 Yahoo's current ROE of 28.15% greatly exceeds its ROE of 8.5% in Q4 2011
6 Yahoo's Equity to Debt ratio of 11 is better than the industry average of 6
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.