Yahoo! Is Waiting to Be Carved Up Like a Thanksgiving Turkey
Yahoo! (YHOO) reports second-quarter fiscal 2016 earnings after the close Monday. Investors will be listening for updates on the expected Yahoo! carve-up. If the sale is successful, Yahoo! could be worth $45 to $50 per share. It closed Friday at $37.72.
Year to date, shares of Yahoo! are up 13% as investors anticipate a sale of the company's core assets. With bidding due at the end of business Monday, I expect investors will ignore the second-quarter report and instead look for progress on the sale.
In April, Yahoo! reported an in-line first quarter and gave lower guidance for the second quarter. Revenue remains under pressure due to lower click volumes and non-stop market-share loss to Alphabet's (GOOGL) - Get Report Google. (Alphabet is an Action Alerts PLUS holding.) Yahoo! also faces poor performance in mobile advertising.
In the first quarter, Yahoo! reported revenue, less traffic acquisition costs, of $859 million. That was down 10%, but roughly $12 million above the Street consensus figure. Earnings before interest, taxes, depreciation and amortization were $147 million, also above the consensus of $116 million. Earnings per share were 8 cents. Expenses declined $99 million to $712 million as the company said goodbye to 2,500 employees in the quarter.
Revenue for the "Mavens" group -- mobile, video, native and social -- was up 7% to $390 million. Mobile revenue rose 11% to $260 million and native display advertising rose 28% to $142 million. This was the slowest Mavens growth we've seen since the company began reporting Mavens numbers.
Yahoo! continues to lose ground to Google. The number of paid clicks fell 21% in the first quarter and was down 10% sequentially. Revenue less traffic acquisition costs was down 20% in the Americas, down 7% in Europe and down 11% in Asia and the Pacific. The only piece of good news was Yahoo! ended the quarter with $7 billion in cash on the balance sheet and free cash flow turned positive, at $297 million.
Management guided down for the second quarter. The company expects revenue, post-traffic acquisition costs, of between $810 and $850 million and adjusted EBITDA between $135 and $155 million. Earnings per share are expected to be down 40% to 10 cents.
Despite the weak first quarter and the second quarter guide-down, management kept the previous end-of-year guidance in place. For the year, the company is looking for revenue, ex-TAC, of between $3.4 billion and $3.6 billion. Operating income is expected to be between $150 million and $250 million.
In reality, I don't think the second quarter matters much. Investors have given up on Yahoo! the company and are simply listening for an update on the sale of the company's core assets.
Right now, it appears the bidders are Dan Gilbert (the founder of Quicken Loans), Verizon (VZ) - Get Report , TPG, Advent International, Vista Equity Partners and AT&T (T) - Get Report . Analysts believe Verizon is the most likely winner.
While Yahoo! could still reject any offer, any deal should provide some upside the to stock, especially if management then turns its attention toward spinning off Yahoo! Japan.
In a sum-of-the-parts valuation, Yahoo!'s core operations could be worth $3.50 to $4 per share, while the Alibaba (BABA) - Get Report stake is probably worth around $25 and Yahoo! Japan is worth about $6 or $7 per share. The company has $6 per share in cash.
Add it all up and Yahoo! is worth over $40. Some bulls think Yahoo! is worth over $47 per share. Theoretically.
With the stock trading around $37, it's hard to justify taking the risk the company will be carved up and the deal-making will unlock at least $40 a share in value. It could take 18 months (or more) to get all these deals done, and during that time, if Alibaba goes down, or the IRS rules against the company (again) it could seriously disrupt the bulls' carve-up thesis.
Why take the risk?
There are easier ways to make money in the stock market. I would avoid shares of Yahoo!
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.