With the year coming to an end and with Yahoo! Inc. (NASDAQ:YHOO) shares recently hitting analysts’ target price, Citi research has taken a fine-tooth comb to firm’s model. They have made four main adjustments:
Carlson Capital's Double Black Diamond Fund returned 85 basis points net in August, bringing its year-to-date net return to 4.51%. According to a copy of the fund's September update, which ValueWalk has been able to review, its equity relative value and event-driven strategies outperformed during the month, contributing 131 basis points to overall P&L. Double Read More
1) increased their CY14 opex to better reflect mgmt’s 3Q13 commentary; 2) raised their target P/E multiple for Alibaba Group (AG) to 29x from 22x (and thus their AG target valuation) to reflect comp gains; 3) Analysts are no longer assuming a tax efficient treatment for a portion of the AG stake in order to be more conservative; and, 4) They are adjusting firm’s core Y! valuation to reflect removal of the cash TIPLA payment (~$100mm/year) at AG IPO. The impact of the changes to research firm’s core Yahoo! assumptions causes their CY14 adj. EBITDA estimate to decline to $1.32bn from $1.50bn (consensus is $1.56bn), but Citi’s price target increases to $46 from $39 due to the increase in theirr AG target valuation.
Three notable assumptions analysts made that could change:
1) They are assuming a 1% increase in opex in CY14 vs. annualized 4Q13. Every 5% incremental y/y increase (e.g., +6% vs. 1%) equates to $1 in downside to firm’s price target; 2) They are assuming Yahoo! Inc. (NASDAQ:YHOO) owns 24% of AG, but the diluted stake could be lower. Every 1% reduction in diluted ownership equates to $1 downside to firm’s target; and, 3) user engagement metrics remain solid, but analysts assume only 1% net revenue growth in CY14.
Many investors have been and continue to be fixated on the likely IPO of Alibaba Group as the key catalyst and reason for owning Yahoo! Inc. (NASDAQ:YHOO) shares, and some are concerned about the sell-on-the-news risk for YHOO. Citi believe YHOO shares can continue to out-perform, even after the IPO, for three main reasons: 1) it will still hold ~14% of AG, which will represent approx. one-third of Yahoo! Inc. (NASDAQ:YHOO)’s value; 2) continued large excess cash balance and share buybacks; and, 3) continued core Yahoo! improvement and revenue growth inflection.