Yahoo! Inc. (NASDAQ:YHOO) disappointed pretty much all around in this week’s earnings report—except in one key area that stole investors’ attention in after-hours trading last night. Analysts say it wasn’t all bad but that the bad greatly outweighed the good in the company’s report. Pivotal Research analysts cut their price target for Yahoo, while UBS analysts say investors will now start shifting their focus away from the company’s capital return plan and toward the company’s general health.

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Yahoo’s earnings much worse than expected

In a report dated July 16, 2014, analyst Brian Wieser reduced his price target for Yahoo from $38 to $37 per share and maintained his Hold rating. The search giant posted a decline of 8% in display ads, and the analyst called the previous quarter “something of a false dawn for display.”

He says “a modest level of revenue” from Tumblr has apparently failed to appear, and Yahoo also saw worse shortfalls in display advertising. The search giant reported a lower mix of premium ads, although he thinks this has been happening for a while now and notes that the trend is not only happening to Yahoo. He thinks the company’s efforts to get spending from both premium display and online video ads haven’t really worked. However, he thinks Yahoo is moving in the right direction by licensing some of its content, but he says more is needed.

One small area of brightness was search growth, which was 6% excluding traffic acquisition costs. However, Yahoo’s Other revenues fell 10%, more than wiping out that gain. Also the company’s adjusted EBITDA guidance of between $220 million and $260 million for the third quarter would end up being the company’s lowest result since late 2008.

Mixed news about Alibaba stake

Along with last night’s report, Yahoo said it will be able to keep more of its stake in Alibaba than it previously expected to. Of course this is good news, as much of the company’s valuation has hinged on that stake in the very healthy Chinese online retailer. However, analysts say there’s even more bad news here as well.

Wieser said the company has no strategy regarding the proceeds it will earn from the sales of part of its stake in Alibaba in the Chinese e-retailer’s initial public offering. Yahoo will sell just 140 million shares, down from the previous 208 million reported. Half of the after-tax proceeds will be returned to shareholders, amounting to about $9 billion before taxes. With a 35% tax rate, that leaves about $6 billion in proceeds, with $3 billion returned to shareholders and $3 billion being left on Yahoo’s balance sheet.

He expects that investors will be disappointed about the taxes the company will pay and the fact that the company doesn’t appear to have plans to cut down on the balance it will owe.

Alibaba concerns to abate?

In a report also dated July 16, 2014, UBS analysts Eric J. Sheridan, Vishal J. Patel and Timothy E. Chiodo were less critical about Yahoo’s plans for its Alibaba stake. They think investor worries about proceeds from the stake sale and possible mergers and acquisitions will recede. They also think the company’s share price will close the gap with their price target of $47 per share. They have a Buy rating on Yahoo.

They believe that now investors will worry less about capital return and refocus on the strength they believe remains in Yahoo’s core business. They think investors will demand that management focus more on cost discipline “in the absence of meaningful revenue growth improvements.”

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