Yahoo!'s ( YHOO ) core business is lagging despite numerous website and product refreshes. However, the stock has performed exceedingly well over the past three months as the price has soared from $33 to $41 post the the listing of Alibaba's American depository receipts (ADR), through which it raised close to $25 billion. While we estimate that each ADR of Alibaba is worth $80, it continues to trade near $90 level. Post our valuation of Alibaba's ADR, we have revised our stock price estimate for Yahoo! from $34.38 to $41.53. In this note, we will discuss our valuation for the company.
Majority of Value in Non-Operating Segments
According to our estimates, nearly 74% of Yahoo!'s value comes from non-operating segments, which constitute of the company's stake in Alibaba and Yahoo! Japan, as well as cash. Below is the overview of these non-operating segments:
Yahoo!'s Stake in Alibaba: Post the ADR listing, Yahoo!'s stake in Alibaba has declined to 16.3% or 383.57 million shares. While we value this stake at $19.5 billion post tax (i.e., $80 per ADR), Alibaba still makes up nearly 47% of Yahoo!'s estimated value. Considering the market sentiments surrounding Alibaba, the value of Yahoo's stock can be significantly higher if Alibaba's valuation were to increase in the coming months.
Yahoo!'s Stake in Yahoo!Japan : We estimate Yahoo! Japan's valuation to be near $23 billion and Yahoo! has nearly 35% stake in it. Based on this estimate, Yahoo!'s stake in Yahoo! Japan is worth $5.92 billion after taxes. As a result, Yahoo! Japan makes up nearly 14% of Yahoo!'s value.
Cash Position Boosted Post IPO: At the end of Q2, Yahoo! had over $2.74 billion in cash and short-term marketable securities. The company's cash position increased by $5.9 billion (post 38% tax payment on $9.52 billion) due to sale of 140 million shares in Alibaba's listing. While we expect Yahoo! to return 50% of the cash from IPO proceeds to shareholders, the company will continue to hold on to remaining $2.95 billion that can be deployed either for acquisition or researching and developing new products.
Yahoo!'s Core Business
The company owns various popular properties such as Yahoo! Mail, Yahoo! Sports and Yahoo! Finance; And it had approximately 800 million monthly unique visitors worldwide in 2013. Overall, Yahoo! is ranked among the top 5 Internet sites, both globally and in the U.S., and is used by approximately 20% of the worlds Internet users on a daily basis. We believe Yahoo!'s core business to be worth $10.9 billion based on the fact that it generates over $1 billion in cash annually. These divisions make up nearly 25% of Yahoo!'s estimated value. Our take on its core area of operations is as follows:
Display Advertisement Is Biggest Operating Segment
According to our estimates, Yahoo!'s display advertising segment is its biggest operating segment, making up for around 10.5% of the company's total value. The key metrics for this is revenues per pageview ( RPM ). While the number of display ads sold across Yahoo! properties rose over the past two years, the price per ad declined due to unfavorable shift in mix from premium ads to low cost ads. As a result, RPM declined from $1.53 in 2010 to $1.10 in 2013. Even though the company continues to roll out premium display content, it is yet to be fancied by advertisers who continue to spend less across Yahoo! properties. Furthermore, we expect the international mix of total display ads to increase that can drag ad prices down. Going forward, we expect revenue per impression to remain flat, but do think that opportunities exist for Yahoo! to drive growth.
For example, the company is trying to address the decline in its display ads revenues by developing and delivering bespoke content across its mobile platform. By doing so, Yahoo! has been trying to boost user engagement and increase unique user count. Better content and user engagement can increase the time spent on the website and advertisers are willing to pay higher revenue per impression for these sites. Yahoo! is ranked third in terms of time spent by a user on the website. Currently, we project RPM for Yahoo! to remain flat at $1.10 per 1,000 impressions. However, we estimate display ads revenues to grow to $1.9 billion by 2021 due to increase in the number of ads sold across both desktop and mobiles.
Search Advertising To Grow, Albeit At A Slower Pace
While display advertisements constitute the majority of the company's operating value, search advertising also contributes around 10.2% of total value. Despite a deal with Microsoft in 2009, when Microsoft agreed to power Yahoo! Search and search ads, Yahoo!'s search ads revenues declined from $1.8 billion in 2009 to $1.47 billion in 2011. However, over the past two years, revenue has increased marginally to $1.6 billion in 2012 and $1.7 billion in 2013. This growth has primarily been due to overall improvement in online search ads. While the search ads revenues in the U.S. grew by over 9% in 2012-2013 period from $16.9 billion to $18.4 billion, growth in Yahoo!'s search ads lagged the industry as over all search revenues grew by 5.5%. To combat this, the company decided to build a robust mobile platform by acquiring smaller companies. As a result, Yahoo! reported growth in its total mobile unique visitors, which grew to over 450 million in the second quarter. The growth in its unique visitor count is important for Yahoo! as a bigger user base will consume more content across the company's websites. This in turn, will translate into higher pageviews and searches across all Yahoo! platforms, and thus improve revenue across search ad divisions. While we estimate that Yahoo!'s search ads revenue will increase to $1.9 billion by 2021, it will continue to loose market share to incumbent i.e. Google.