Yahoo Inc.
/(YHOO - NASDAQ)
/ $49.65Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 1Q17 Earnings Update
Prev. Ed.: Feb 17, 2017; 4Q16 Earnings Update
Brokers’ Recommendations: Positive: 36.84% (7 firms); Neutral: 63.16% (12); Prev. Ed: 13, 13, 0
Brokers’ Target Price: $45.9 (↑$1.7 from last edition; 19 firms) Brokers’ Avg. Expected Return: -8.2%
Note: A flash update was done on Apr 19, 2017 (1Q17 Earnings Update)
Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.
Portfolio Manager Executive Summary
Yahoo Inc. (YHOO) is a global technology company offering Internet search, content and communications toolsin more than 45 languages worldwide.The company derives its revenues from display and search advertisements on its Internet properties.
Key factors for evaluating an investment in Yahoo shares are as follows:
- Yahoo has a stake in Yahoo Japan, which while being less valuable than Alibaba, does add to its coffers.
- Upon completion of the Verizon deal, Yahoo's remaining business, including the stakes in Yahoo Japan and Alibaba, along with convertible notes and non-core patents will become an investment company known as Altaba, Inc.
Competition:Competition between the largest search and content aggregators has increased significantly,with larger companies entering adjacent areas in pursuit of growth and players like Facebook entering the market.Yahoo's main competitors at this time are Google (GOOGL), Microsoft (MSFT), Facebook (FB) and AOL.Google remains the leader by far in the search market andFacebookthe leader in social networking.
Of the 21 analysts in the Digest group covering the stock, nine issued apositive rating, whilethe rest had a neutral stance. Target prices range from $32.00 to $57.00, withthe average being $44.24. The average expected return on the current price is 13.1%.
Bullish (Buy or equivalent ratings) – 7analysts or 36.84%:
These analysts are optimistic about the Yahoo-Verizon deal and believe that it will improve the company’s cost structure. They believe that the sale of the core business, real estate, non-strategic patents and other non-core assets, and reduction in workforce will help the company generate significant cash. These analysts are also positive about Yahoo’s Asian assets and holdings in Alibaba, which, they believe, would lead to higher growth going forward.
Cautious (Neutral or equivalent ratings) – 12analysts or 63.16%:
These analysts believe that Yahoo’s Asian assets and holdings in Alibaba have great prospects but are are skeptical about how far the sale strategy will help the company.
Long-term Growth – Yahoo’s long-term growth depends much on the sale ofits core business and what the company plans with its remaining business. Once the Verizon deal is completed,Yahoo's remaining business, which includes the stakes in Yahoo Japan and Alibaba, along with convertible notes and non-core patents will become an investment company known as Altaba, Inc.
May 17, 2017
Overview
Yahoo Inc. hasone of the largest and most-visited web portals, with more than 700 million users worldwide (according to comScore).The company offers Internet-based products and services to independent consumers and business users.The company’s principal product is the Yahoo.com portal.
Search revenues aregenerated through links placed on owned or affiliate sites, with revenues coming from paid clicks, i.e. when a user clicks a link sponsored by an advertiser. Yahoo pays a commission to affiliates on ads sold on their properties. Affiliate agreements typically span 1-3 years.
Yahoo’s Display business consists of graphical ads on its own or affiliate properties that may be offered as guaranteed (premium) or non-guaranteed placements, handled by the Right Media Exchange.Similar to the Search business, Yahoo pays affiliates for paid clicks hosted by them.
Other revenues include listings-based services revenues, transaction revenues, royalties, and fees revenues.
More information is available at
The analysts have identified the following factors for evaluating the investment merits of Yahoo:
Key Positive Arguments / Key Negative Arguments- Asian Assets –Its stake inYahoo Japanis expected to support its stock price in the next few quarters.
- Alibaba Stake Spin-off- This will enable the company to avoid a tax bill that could have cost billions in the future. In addition, Yahoo can now fully concentrate on pursuing significant growth.
- Weak Pricing – Yahoo is seeing weaker pricing in both display and search businesses. While this is partly because of programmatic buying, it also speaks of competitive pressure.
- Lack of Visibility –Yahoo’s results include its Asian assets, which overshadow core results. The large number of acquisitions not only increases costs, but also makes it hard to determine the performance of the core business.
Note:Yahoo’s fiscal year ends on Dec 31.
May 17, 2017
Long-Term Growth
Yahoo’s long-term growth is dependent on the fate of its core search and display advertising business, whichis being acquired by Verizon. Yahoo is still one of the largest online players in the world. The company has been facing some serious challenges for years. It has been losing its digital advertising foothold to competitors like Facebook, Inc. and Twitter, Inc. (TWTR).
Under CEO Marissa Mayer, who took over in 2012, the company has tried to turn itself around but all its attempts went in vain.The company had to scrap its plan to spin-off the $32 billion stake in Chinese e-Commerce giant, Alibaba, amid investors’ concern about an enormous tax bill.Mayer’s plan to spin off a separate company out of the $32 billion stake in Alibaba was abandoned mid-way when ongoing changes in IRS tax policies made a tax-free separation uncertain. Yahoo’s languishing revenues and profits are a major concern for investors. Jeffrey C. Smith, the chief of the hedge fund Starboard Value began agitating and called for the sale of Yahoo’s core business to mitigate the Alibaba tax issues. Yahoo’s board started accepting bids for the business in Feb 2016.
The company finally managed to sell its core operating business to Verizon for a little over $4.8 billion. However, the closure of the deal was delayed as Yahoo disclosed two cases of massive data breach. Yahoo was finally forced to make a billion dollar discount in the purchase agreement in the wake of the data breach disclosures. Verizon will now buy Yahoo’s core Internet business at a discount of $350 million for $4.48 billion.
The newly negotiated deal will make Altaba responsible for all costs stemming from shareholder lawsuits and a regulatory inquiry by the Securities and Exchange Commission. However, Verizon and Altaba will split costs from all other hack-related lawsuits and government investigations.
As part of the buyout, Verizon will receive Yahoo’s owned and operated assets (search engine, communications platforms and digital content), advertising products (Flurry, Brightroll and Gemini), social assets (Tumblr, Flickr, and Polyvore) and remaining real estate. Yahoo will retain its stake in Alibaba Group Holding Limited and Yahoo Japan Corp., minority investments, Excalibur patent portfolio, and cash & convertibles.
The deal is expected to close in the second quarter of 2017 until which Yahoo will continue to operate independently.
May 17, 2017
Target Price/Valuation
Provided belowdoes Zacks Digest Research compile a summary of valuation and rating as:
Rating DistributionPositive / 36.84%↓
Neutral / 63.16%↑
Negative / 0.00%
Average Target Price / $45.88↑
Digest High / $58.00↑
Digest Low / $32.00
Analysts with Target Price/Total / 17/19
Risks associated with the achievement of the price target include search and display advertising share losses, escalating competition, risks related to mobile asset profits, new initiatives that are unable to gain traction; risksconnected to strategic alternatives process, a secular decline in Display business, managerial instability, execution risks, and a macroeconomic slowdown.
Recent Events
On Apr 18, 2017, Yahoo reported first-quarter 2017 results. Highlights are as follows:
Yahoo reported GAAP revenues of $1.327 billion, up 22.1% Y/Y but down 9.7% sequentially. Traffic acquisition cost (TAC) was up 116.7% Y/Ybut down 3.1% sequentially.
GAAP net income per share was $0.10as againstloss of $0.10 in 1Q16.
Non-GAAP earnings per share were $0.08compared with$0.18 a year ago.
Revenues
As per the press release, Yahoo reported GAAP revenues of $1.327 billion, up 22.1% Y/Y but down 9.7% sequentially. Traffic acquisition cost (TAC) was up 116.7% Y/Y but down 3.1% sequentially. Excluding these costs, net revenue (revenue ex-TAC) was down 3.1% Y/Y and 15.2% sequentially.
By geography: Yahoo generated around 78.1% of revenues on an ex-TAC basis from the Americas (down 2.2% from Mar 2016 but flat sequentially), around 6.7% came from the EMEA region (down 11.9% Y/Y and 10.4% sequentially) and 15.2% from the Asia/Pacific (down 5.9% Y/Y but up 3.4% sequentially).
Yahoo combines revenues from O&O and affiliate sites and presents under Search and Display categories.
Searchrevenues (ex-TAC) were down 12.4% Y/Y and 7.9% sequentially. The key metrics were a disappointment in the first quarter, with paid clicks dropping 12% Y/Y. Price per click (PPC) however grew 10%.
Displayrevenues (ex-TAC) grew 4.8% Y/Y but were down 24.8% sequentially. The number of ads sold increased 2% from the year-ago quarter with price per ad (PPA) remaining flat.
Mavens(mobile, video, native, social) grew 35.6% Y/Y but decreased 11.5% from the previous quarter.
Mobilegrowth is extremely important because of the increasing use of mobile devices to connect to the Internet. Traffic-driven mobile revenues amounted to $412 million in the first quarter, up a massive 58.5% Y/Y but down 11.4% sequentially.
Other(fees, listings and leads) revenues were down 4.3% Y/Y and 2.6% sequentially.
Display, Search and Other platforms represented 48%, 37% and 15% of Yahoo’s fourth-quarter ex-TAC revenues, respectively.
Outlook
Yahoo did not provide any guidance for the second quarter of 2017 as it will be acquired by Verizon by the second quarter.
Margins
Yahoo generated gross margin of 43.5% in the first quarter, down 958 basis points (bps) Y/Y and 407 bps sequentially.
The company’s operating margin of (4.4%) was poorer than the previous quarter’s 5.6%.
Outlook
Yahoo did not provide any guidance for the second quarter of 2017.
Earnings per Share
Yahoo’s non-GAAP income was $80.1 million or 7.2% of sales compared with income of $169.5 million or 12.8% of sales in the year-ago quarter.
Including the special items and the amount given out to non-controlling interests, Yahoo’s GAAP net income was $99.4 million ($0.10 per share) against net loss of $99.2 million (loss of $0.10 per share) in the March quarter of last year.
Outlook
Yahoo did not provide any guidance for the second quarter of 2017.
May 17, 2017
Research Analyst / Shuvra Shankar DeyCopy Editor / Debasmita Banerjee
Content Ed. / Shalu Saraf
No. of brokers reported/Total brokers / 17/19
Reason for Update / 1Q17EarningsUpdate
Lead Analyst/QCA / Aniruddha Ganguly
Zacks Investment ResearchPage 1