Buyout Talk Puts Yahoo!'s Yang on the Spot
With its shares trading at a level not seen in four years and rumors of imminent layoffs circulating, Yahoo!'s ( YHOO) first-quarter earnings report after Tuesday's closing bell comes with dark clouds overhead. On the other hand, many on Wall Street continue to hope that much of the company's woes are now reflected in its battered stock price. And as it drifts lower -- shares closed at $20.78 on Monday, off more than 30% in the past three months -- speculation grows that the company could be an acquisition target as its market cap shrinks to less than $28 billion. Search rival Google ( GOOG), for example, sports a valuation of more than $173 billion. For some investors, that's another reason to bet on a Yahoo! rally.
For the fourth quarter, analysts surveyed by Thomson Financial/First Call expect Yahoo! to announce earnings per share of 11 cents on revenue of $1.41 billion. But Wall Street's hopes for the report aren't high. The first quarter will be merely in line with expectations; Yahoo!'s display ad business faces headwinds even as it continues to bleed market share to Google in search, Credit Suisse analyst Heath Terry wrote in a research note Thursday. Moreover, the company's guidance for 2008 should be soft. "We believe Q4 was another challenging quarter for Yahoo, as they continued to lose share in search and some of their highest value verticals," Terry wrote. "While cost containment, acquisitions, and reasonable expectations are likely to result in a quarter roughly in line with consensus, we believe the guidance for 2008 will come in below current consensus of $5.92 billion in revenue of $0.53 in EPS." Still, Terry agrees with those who believe much of the bad news is already priced into the stock. "
We believe that investor expectations for such are reflected in the stock at current levels and see little downside given the strong balance sheet and 5% free cash flow yield," he wrote. But along with factors like a battered stock price and planned improvements, Terry also cites the "potential for a purchase" as one of the reasons for owning Yahoo!. Indeed, CEO Jerry Yang has an ambitious turnaround vision for Yahoo!. It includes making the company the company's Web page the starting point for a growing number of users, evolving its ad space into a must-buy for more advertisers, and opening up Yahoo! to third-party software developers. And if widespread speculation turns out to be correct, it will likely mean a workforce reduction, possibly to be announced in the company's earnings report or conference call. Current estimates have Yahoo! cutting anywhere from "hundreds" to 2,500 jobs, resulting in a boost to 2008 operating profit of up to 30%. But for many longer-term investors, the proposition that Yahoo! holds is that even if Yang stumbles, investors will ultimately be rescued -- and hopefully, reap a decent premium -- if a suitor scoops up the beleaguered company. Even those on Wall Street who feel the current quarter will be shy of expectations believe that the chance of Yahoo! being acquired ultimately limits the danger in Yang's aggressive gamble to turn the company around. "While FY08 is a make or break year for this management team, we believe the turnaround's downside risk is limited by the likelihood of a sale," wrote Jefferies analyst Youssef Squali in a Friday research note.