Yahoo! Inc. (NASDAQ:YHOO) might be reporting their second quarter earnings today, but the talk is all about Alibaba.
In the News
Today, July 15th, Yahoo! Inc. (NASDAQ:YHOO) will be reporting their second quarter earnings. Much of the focus for investors will be regarding Yahoo!’s plans for money they will get from the sale of their shares of Alibaba.
In 2005, Yahoo! made a $1 billion investment in Alibaba. Even though China Internet bought back much of that amount, Yahoo! still owns more than 22%.
As Alibaba filed their own IPO (which is set for August), Yahoo! is required to sell approximately 40% of their remaining shares of Alibaba shares, totaling 208 million. This sale can result in upwards of a $10 billion windfall for the Yahoo! However, while some financial experts are excited about this windfall, others are worried about the tax headache that will result.
Yahoo’s current market capitalization is $35 billion.
So, many analysts and investors are looking to see what Yahoo! does with payout as well as how they handle the tax issues that will arise.
While much of the focus will be Yahoo! Inc. (NASDAQ:YHOO)’s plans for the income coming from Alibaba, financial experts are also looking to see progress in the company’s ad business.
Cantor Fitzgerald analyst Youssef Squali estimates that Yahoo! will announce that their display revenue will increase by 2.9% year-over-year to $435.6 million and search will increase by 7.3 percent, “While this is a move in the right direction, it’s still very weak compared with growth seen by industry competitors,” Squali said, “In our view, for the stock to work longer-term, management needs to prove that it can get Yahoo to grow at industry rates, something easier said than done.”
Analyst Recommendations
On July 14th, FBR & Co.’s William Bird initiated coverage of Yahoo! with a buy rating and a price target of $37, explaining that “With the value of Yahoo!’s stake in Alibaba now well understood by the market, we believe investor focus is likely to shift back to Yahoo! Inc. (NASDAQ:YHOO)’s fundamentals, which could take time to turn around,” he believes, although “downside risk appears limited given Yahoo!’s asset protection including a prospective $10+ billion net cash balance and valuable equity stakes in Alibaba and Yahoo! Japan.” He went on to explain that, “We do not anticipate Yahoo! breaking out from its current low-single-digit share of total digital ad spending. After ceding the search market to Google and failing to pay up for start-ups that went on to become top Web properties, YHOO today lacks a strong value proposition for users (i.e., a killer app), in our opinion. As a result, user engagement is low, and YHOO is left with a low-growth search business it does not even control and a display business reliant on low barrier-to-entry content production and distribution. While Yahoo! will still be able to ride growth trends in its focus areas of mobile, social, video, and native, without a strong value proposition for users to stick to YHOO’s properties, we think advertisers will continue to treat YHOO as a secondary option.”
Bird has an overall success rate of 85%, resulting in an average return of +13%.
On July 11th, S&P Capital’s Scott Kessler maintain a Buy rating with a $45 price target. Kessler said that Yahoo!’s “new emphasis on focused operations and the allocation of resources will help profitability and growth.” He further predicts that the company will post earnings of $0.35 cents a share for the second quarter.
Kessler has a 77% success rate overall, with a +4.2% averge return. Regarding his recommendations for Yahoo! Inc. (NASDAQ:YHOO), he has a 70% success rate, resulting in an average return of +8.8%.
On July 10th, Topeka Capital analyst Victor Anthony reiterated a Buy rating on Yahoo! but lowered his price target from $49 to $47. While “we remain cautiously optimistic on Yahoo!’s core business and expect the core drivers to continue to move in the right direction,” Anthony explained, “a full turnaround is likely years out. Capital allocation will be a key focus given the forthcoming cash haul from the Alibaba IPO…The market is undervaluing Yahoo!’s shares below our bear case scenario due to concerns around inefficient use of capital, concerns the IPO valuation could be lower than anticipated, concerns around slowing Alibaba growth, and the broader sell-off in Internet stocks. The former three concerns are likely to be resolved in the near-term leading to upside to the share price.”
Anthony has an overall success rate of 73% and an average return of +19.5%. Regarding his recommendations for Yahoo!, he has a 71% success rate, resulting in an average return of +14.2%.
Another top ranked analyst, Youssef Squali of Cantor Fitzgerald, also issued a BUY rating for Yahoo!, but with a price target of $42.
Squali has a 77% success rate and an average return for all recommendations of +30.3%. Regarding his recommendations for Yahoo! Inc. (NASDAQ:YHOO), he has a 62% success rate, resulting in an average return of +11.9%.
However, not everyone is ready to buy Yahoo! just yet.
Pivotal Research ‘s Brian Wieser issued a Hold rating for Yahoo! with a $38 price target on July 9th. Weiser said, “Very little that Yahoo reports will matter. What will matter for the stock is if there is any commentary on the call about the tax plans for the proceeds from the Alibaba IPO…I’ll be looking to see how they will prevent paying 35 percent in taxes. And then the next question is what are they going to do with the cash that is left after taxes.”
Wieser has an overall success rate of 96% with an average return of +33%. Regarding his recommendations for Yahoo! Inc. (NASDAQ:YHOO), he has a 100% success rate, resulting in an average return of +35.4%.
The top expert consensus for Yahoo is a MODERATE BUY.
Conclusion
Will Alibaba be Yahoo! Inc. (NASDAQ:YHOO)’s genie in a bottle, making all your financial dreams come true? Some analyst seem to think so!
