Yahoo Earnings Report Highlights Importance Of Alibaba: Susquehanna

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Susquehanna Financial Group analyst Brian Nowak and Michael Costantini rate Yahoo! Inc. (NASDAQ:YHOO) as Neutral as the company’s core business continues disappointing but the stock’s valuation is all about Alibaba.

Yahoo’s earnings highlights

4Q:13 results were modestly lighter than expected, but ’14 is set to be another year of investing and hoping for a turnaround as Yahoo! Inc. (NASDAQ:YHOO) guided 1Q:14 gross revenue to $1.12bn-$1.16bn. The midpoint of rev guidance is 2% below our old est (of $1.16bn). Investment spending is coming too as the midpoint of 1Q:14 EBITDA guidance ($290mn- $330mn for a midpoint of $310mn) is 17% ($62mn) lower than we previously modeled. Yahoo didn’t formally issue FY ’14 EBITDA guidance, but said ’14 EBITDA will decline modestly YoY vs. us previously at +2% growth.

Yahoo’s valuation remain all about its stake in Alibaba

Alibaba cal 3Q:13 revenue grew 51% YoY, below our 65% estimate, but profitability (44% EBIT margins vs. us at 15%) was much better as gross margins were again 70%+. This is giving Alibaba more dollars to invest as it rapidly grows. As such, we are adjusting our Alibaba model for modestly slower rev growth but higher profitability and continue to value it at ~$160bn.

The next Alibaba datapoint should be positive too, as Yahoo! Inc. (NASDAQ:YHOO)’s 1Q:14 results will reveal Alibaba’s 4Q:13 numbers, which included 2013 Singles Day where GMV was up ~$2.6bn YoY ($5.7bn in ’13 vs. $3.1bn in ’12). We expect Alibaba cal 4Q:13 rev growth to reaccelerate to 55% YoY growth. As we have written (Playing for Multiple Expansion? Look Here.), companies posting rev acceleration and margin expansion see multiple expansion.

Yahoo’s core online display continues to underperform

Yahoo! Inc. (NASDAQ:YHOO) core online display continues to underperform our expectations as 4Q:13 online display fell by 6% YoY, missing us by 1%. The miss was driven by a -7% decline in ad unit pricing from the roll-out of Yahoo’s new in-stream performance-based native ads. Pricing excluding in-stream ads was up marginally but it is difficult to see this headwind materially improving over the next few quarters given native ads are one of YHOO’s primary display growth initiatives in ’14. As such, we are reducing our ’14 display revenue estimate by 5%, now modeling a -1% YoY decline (vs. +3.5% growth prev).

Yahoo’s core paid search upside through out 2013

Core paid search has been one source of upside thru-out ’13 (beating us again by 6.5% in 4Q:13). Yahoo! Inc. (NASDAQ:YHOO)’s 4Q strong search results were driven by the addition of more than 100 new search partners, user interface changes to make ads more prominent, and marketplace improvements. As such, we are raising our ’14 search estimate by 5%, now expecting 12% YoY growth (vs. 9% growth prev).

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