SAN FRANCISCO -- Another week, another tease for Yahoo! (YHOO) investors.The latest reason for hope came this past weekend when The Times of London reported Sunday that Microsoft ( MSFT - Get Report) was in talks for a complex deal that includes Microsoft paying $20 billion for Yahoo!'s search business. Considering that Microsoft had offered Yahoo! a mere $1 billion this summer for the same deal (a last-ditch stab at something after a full-on buyout was rejected), such a transaction would be the clearest path to boosting Yahoo!'s stock price, which hasn't closed above $12 in nearly four weeks. Investment banking firm Collins Stewart issued a research note Monday suggesting a Microsoft search transaction would lift Yahoo! shares by $8 to $10. Yahoo! hasn't closed above $20 since Sept. 18. Shares of Yahoo! were recently off 4.4% to $11, but with the overall market in another major selloff after a light-volume holiday week, there are worse fates than being down less than 5%. The Times report, which was strikingly detailed, was almost immediately debunked -- this was useful for those in the crowd who didn't know that this latest Microsoft transaction was putting a price tag on Yahoo!'s search business that exceeded the company's total market cap of $15.2 billion. Former Fox Interactive Media chief Ross Levinsohn, who the Times said would be part of a new Yahoo! management team, was quoted by AllThingsD power blogger Kara Swisher as saying the deal was "total fiction." Of course, Levinsohn's comment is fodder for "true believers" who would see such adamancy as proof that the deal is nearly done. Unfortunately, believing in saviors for a turnaround in Yahoo! -- whether it be recently ousted CEO Jerry Yang, Microsoft or newish Yahoo! director Carl Icahn -- has yet to pay off. And so it goes for traders looking for a short-term profit on each rumor of renewed Microsoft interest or think to themselves "Carl must really know something this time!" (Icahn recently bought an additional 6.7 million shares in Yahoo!, boosting his stake in the company to 5.4%).
At the end of the day, what's abundantly clear from following Yahoo! during the 2008 post-buyout-rejection months is that the only payoff for owning the stock is with a longer view. If investors are unwilling to endure some pain in the months ahead with a formerly great Internet company awaiting a new CEO amid a retrenchment in online advertising, this probably isn't the stock for them. The good news is that a compelling argument can be made for those willing to be patient. Topping the list is valuation: Yahoo! is trading at just over 2 times trailing revenue, less than half its level from the past four or five quarters. Certainly some of that compression has resulted from the company's slowing revenue growth. Year-over-year revenue rose just 1% in the company's most recent quarter, whereas it had climbed 6% three months earlier. But Yahoo! needn't be headed for the dustbin. While the company's search business continues to cede market share to Google ( GOOG - Get Report), Yahoo! still has attractive assets and a powerful online display advertising reach that can be expanded once the company regains focus. That's not to say the likelihood of a deal with Microsoft, at least via a search transaction, should be ignored. Such an agreement makes great sense for both companies, which could make the challenge for search-advertising dollars more interesting as they leverage their online properties to capture a higher percentage of queries. However, making sense and making a deal are two different things. Yahoo!'s attractiveness at these levels doesn't have to depend on reading the tea leaves out of Redmond, Wash.