Yahoo! Inc. ( YHOO ) is slated to report fourth-quarter 2014 results on Jan 27, 2015. In the last reported quarter, Yahoo recorded a positive earnings surprise of 105.00%. Let's see how things are shaping up for this announcement.
Factors to Consider
Yahoo's third-quarter revenues and adjusted earnings sailed past the Zacks Consensus Estimate. A refocused display business, strengthening search business and success on the mobile platform supported by good cost control and lower share count drove results.
Following the Alibaba Group ( BABA ) IPO and the sale of a chunk of Yahoo's shares in it, the company finally looks like it is going somewhere. Management appears to be delivering on their promise, buying back a large number of shares during the quarter.
During the fourth quarter, Yahoo was in the limelight for various acquisitions and deals intended to strengthen its position in the digital advertising market.
Its acquisition of BrightRoll on Dec 15, 2014 will reinforce Yahoo's stratagem for search, communications, and digital content. It will facilitate Yahoo's growth in mobile, social, native, and video advertising.
Yahoo also entered into a five-year strategic partnership with Mozilla on Nov 19, 2014. It would make Yahoo the default search engine for Firefox users in the U.S. The deal with Mozilla would add to Yahoo's search traffic in the U.S.
But what's really driving investor sentiment is the growth in the core business. Yahoo was the leader in the traditional PC display ad market, so the secular decline here due to the advent of mobile had a rather significant impact on the company. But it now appears that the company is well on track to reinvent itself with its Gemini platform. This is basically a business wherein Yahoo makes mobile apps, which are monetized through native ads. Management said that 44% of display ads are now native, which is very encouraging as this also means a growing presence on mobile. Nonetheless, most of the traffic still comes from PCs, so there is some way to go.
Yahoo had provided limited guidance for the fourth quarter of 2014. Accordingly, revenue on a GAAP basis is expected to be $1.20 billion-1.24 billion. Yahoo expects to pay $3.3 billion in cash taxes in the first quarter of 2015 in lieu of the Alibaba proceeds.
Our proven model does not conclusively show that Yahoo is likely to beat earnings this quarter as it does not have the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, currently stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 19 cents.
Zacks Rank: Yahoo currently holds a Zacks Rank #3 (Hold), which makes surprise prediction difficult.
We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Other Stocks that Warrant a Look
Stocks with both a positive earnings ESP and a favorable Zacks Rank are:
Apple ( AAPL ) with an Earnings ESP of +0.78% and a Zacks Rank #2 (Buy).
Hutchinson Technology Inc. ( HTCH ) has an Earnings ESP of +7.69% and a Zacks Rank #2.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.