When I profiled Internet giant Yahoo! during April in Yahoo!'s Next Hire Will Make or Break Marissa Mayer I focused on the market's increasing impatience with the company's CEO.
Mayer left Google (GOOGL) about two years ago to take command of Yahoo! and the news media immediately fell in love with her. As a number cruncher, I willingly and readily joined in and concluded the stock was one of the best values on Wall Street.
Logically, it's almost impossible to comprehend why shares in Yahoo! are trading so cheaply. Using my back-of-the-envelope current asset valuation method, I arrive at an appraisal greater than Yahoo!'s market cap.
Estimates on China's Alibaba valuation range from $120 billion to $250 billion, and the $200 billion figure is thrown around often lately. Since I'm conservative and risk-averse by nature, I'll use $150 billion as an appropriate Alibaba valuation.
Yahoo! owns 24% of Alibaba, and based on $150 billion total valuation it's worth (pretax) about $36 billion. Surprisingly to many investors is the fact that Yahoo! Japan is a separate company and Yahoo! only owns a minority stake.
Yahoo! owns about 35% of Yahoo! Japan. The Yahoo! Japan investment adds another $5.4 billion to Yahoo!'s balance sheet. Between the two Asian investments, Yahoo! has $41.4 billion mark-to-market value of assets. Add another billion dollars in cash over and above debt, and we arrive at $42.4 billion in two investments and cash.
However, as of this writing, Yahoo's market cap is only $33.5 billion. That means a share in Yahoo! is worth more than the trading price. That can happen during extreme pessimism, but it doesn't normally last long. The market is too efficient for such an obvious discrepancy to linger. Yahoo! shares recently traded around $33, down 18% for the year to date.
Reducing the investment valuations by 26% to account for tax liability gets us much closer at $30.6 billion. It's anyone's guess what effective tax rate Yahoo! will have to pay, and Yahoo! isn't selling all of its Alibaba shares.
What the numbers clearly suggest is that despite the news media's love affair for Mayer, Wall Street is effectively giving her and Yahoo! a no-confidence vote. It's a mistake that will cost shareholders that are selling and investors that miss-out on buying the number two Internet company for virtually free.
Don't be that investor, don't let news about one missed meeting dissuade you from owning a stock right before the market figures out if Mayer's efforts during the past two years will pay off or not.
In fact, adding to an already long position or buying a dip precipitated by a one-off event is probably the best way to obtain long-term value. Remember, the reason a stock becomes a value is from shareholder emotions pushing it lower than its true value.
After discounting for cash and investments, the person selling the shares is only receiving about $2 a share. Would you buy Yahoo! for $2 right now if it didn't own stakes in Alibaba or Yahoo! Japan? Of course, you would because the core business is profitable, it's the number two internet site and the price-to-earning's multiple would be well under 10.
Adding Alibaba and Yahoo! Japan back in raises the share price valuation from $2 to $33. There's no sure thing on Wall Street, but if Yahoo! can grow its operational profit, the shares have tremendous upside. If Yahoo! can't, the shares are already discounted and are unlikely to continue much lower (and stay lower). That's as good as it gets for an investor using logic and not emotion to make decisions.
Good enough that I bought Yahoo! call options today.
At the time of publication, Weinstein is long Yahoo!.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates YAHOO INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate YAHOO INC (YHOO) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, expanding profit margins and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Although YHOO's debt-to-equity ratio of 0.09 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 3.20, which clearly demonstrates the ability to cover short-term cash needs.
- The gross profit margin for YAHOO INC is currently very high, coming in at 83.44%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 27.50% is above that of the industry average.
- Compared to its closing price of one year ago, YHOO's share price has jumped by 32.16%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- YAHOO INC's earnings per share declined by 17.1% in the most recent quarter compared to the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, YAHOO INC reported lower earnings of $1.26 versus $3.28 in the prior year. This year, the market expects an improvement in earnings ($1.64 versus $1.26).
- You can view the full analysis from the report here: YHOO Ratings Report