Digital media company Yahoo! (YHOO) , whose shares have plummeted some 33% in 2015 and 12% over the past 12 months, will report third-quarter fiscal 2015 earnings results after the closing bell Tuesday.
The once-dominant Internet search giant, headquartered in Sunnyvale, Calif., has lost its lead in various ventures to the likes Facebook (FB) - Get Meta Platforms Inc. Class A Report and Alphabet's (GOOG) - Get Alphabet Inc. Class C Report (GOOGL) - Get Alphabet Inc. Class A Report Google -- two internet kingpins that now dominate search and control advertising spending on both desktops and mobile devices. Yahoo! hasn't been able to regain any ground against them. But it doesn't have to in order for investors to make money on the stock.
Last week, while citing the upward momentum in shares of Chinese e-commerce giant Alibaba (BABA) - Get Alibaba Group Holding Ltd. Report , Yahoo! Japan and Hortonworks (HDP) - Get Hortonworks, Inc. Report (a Yahoo! spinoff), Victor Anthony, analyst at Axiom boosted his price target on Yahoo! stock to $41 a share from $39 -- and 25% above Yahoo!'s current levels of around $33.
Yahoo!, which owns 15.5% stake in Alibaba, said in a September filing with the Securities and Exchange Commission it plans to spin off its 384 million Alibaba shares. This is despite the tax implications of the deal, but Anthony thinks the risks are being blown out of proportion. "The main takeaway is while there are risks of an IRS challenge post the spinoff, the risks are likely to be minimal," said Anthony in an industry note last week.
With Yahoo! trading at just four times trailing earnings, against a P/E of 21 for the S&P 500 (SPX) index, it's tough to ignore how cheaply the market is pricing Yahoo!'s core business. Anthony concedes that it will take several more years before Yahoo!'s media assets and recent acquisitions can deliver real growth. He also added, "We do see options to increase shareholder value including: 1) share repurchases, 2) switching to Google/Alphabet search and 3) further headcount reductions."
To what extent will these options sway investors Tuesday?
For the quarter that ended in September, analysts' average earnings-per-share estimate is for 17 cents a share on revenue of $1.26 billion, compared to the year-ago quarter, when Yahoo! earned 52 cents a share on revenue of $1.09 billion. For the full-year ending December, earnings are projected to be 67 cents a share, down 57%, while revenue of $5.06 billion would mark an increase of 15%.
In both quarterly and full-year projections, revenue is climbing while earnings per share are falling. Still, from my vantage point, with performance expectations so low, the risk-vs.-reward balance in this stock now leans heavily to the positive side.
Not only does the stock have a consensus buy rating, but the average analyst 12-month target of $45.50 is 35% higher than current levels. Ahead of Tuesday's results, good luck finding another stock with this combination of cheap valuation and low-growth expectations that analysts also seem to like.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.