Goldman Sachs Group, Inc. (NYSE:GS) has changed its outlook for Yahoo! Inc. (NASDAQ:YHOO) to a ‘buy’ rating. As per a report from Goldman, Yahoo’s balance sheet and core business are worth more than the company’s current stock price. The revised outlook also highlights the reduced uncertainty over the Alibaba.com Limited (HKG:1688) stake’s value. The company’s future looks secure, as they have a new CEO, and also Yahoo! Inc. (NASDAQ:YHOO) Japan’s stake has appreciated by 30% since May 21.
According to a report from Goldman Sachs Group, Inc. (NYSE:GS) “With the first stage of Yahoo’s process of valuing and monetizing its stake in Alibaba now past, the risk of uncertainty around the value, timing, tax implications, and management’s plans for the proceeds is significantly reduced.” Yahoo plans to payback around 85 percent of the initial round of Alibaba.com Limited (HKG:1688) cash, worth $3.65 billion in buybacks and dividends, “alleviating concerns among investor groups that the funds may be used for risky acquisitions.” As per the report, with Alibaba growing at 64 percent yearly, and ongoing appreciation in the value of other assets, Yahoo’s current stock price looks conservative.
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Even under a best-case scenario, the responsibility of changing the fortunes of the company could take years for the new management, as Yahoo! Inc. (NASDAQ:YHOO) has long been suffering from mismanagement and a talent fight. The report expects the current growth trajectory to continue for Yahoo. The company’s user base has been declining persistently; even its strong segments, like search, are experiencing a significant share loss. Also, the Internet company lacks plans for growing and monetizing a mobile presence. Even under such depressing conditions, Goldman expects the company to generate over $800 million of free cash in 2012, as it is still the fourth-largest site, in terms of unique visitors, and its search business has a potential to grow in the near term.
Goldman Sachs Group, Inc. (NYSE:GS) also lists some of the potential risks to the company’s stock, including “Yahoo’s presence on mobile devices and its ability to monetize its mobile traffic; the significant losses of talent at the company, particularly in engineering”, and “the risk that management will fail to allocate capital effectively.”
The report believes that with the ongoing monetization’s of Alibaba.com Limited (HKG:1688) stake, there is a good probability that Yahoo might liquidate its stake in Yahoo! Inc. (NASDAQ:YHOO) Japan, even though the company itself has acknowledged a valuation gap between the companies. Since the announcement of the Alibaba transaction, the company’s stake has appreciated by almost 30 percent. On the basis of current price, a report from Goldman “values Yahoo’s stake in Yahoo Japan at $4.8 bn, or around $4.00/share.”