Yahoo! Plunges: What Wall Street Thinks

NEW YORK (TheStreet) -- Yahoo! (YHOO) shares fell sharply Wednesday after the company's second-quarter revenue came in below Street expectations, and concerns about the core business continue to weigh on CEO Marissa Mayer. 

Sunnyvale, Calif.-based Yahoo! earned 37 cents a share on a non-GAAP basis, generating $1.04 billion in revenue ex-TAC (traffic acquisition costs), down approximately 3% year-over-year. Adjusted EBITDA for the second quarter of 2014 was $340 million, an 8% decrease compared to the second quarter of 2013.

Analysts were expecting 38 cents a share on $1.084 billion in revenue. and under consensus estimates of a 5% dip in revenue to $1.08 billion in the second quarter.


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Mayer noted that she was not satisfied with the results, and despite several areas of strength, most notably Yahoo! Search, the declines elsewhere impacted the results. "In Q2, we saw display revenue decline, further highlighting the fact that we need to work faster to ameliorate the negative trends.  I believe we can and will do better moving forward," Mayer said in the press release. "Overall, I remain confident in Yahoo's future, our strategy, and our return to long-term growth."

Shares of Yahoo! plunged in early Wednesday trading, falling 4.9% to $33.86.

Mayer has been adamant that the transformation of Yahoo!'s core business (Search and Display) will take years, as she reinvests in the business, looking to boost slowing and declining revenues. "What we know is this transformation is not a singular event," Mayer said on the earnings call. "It is a series of events and quarters, some more challenging than others and some more successful than others and it will take time. In the case of Yahoo!, I have stated in the past that we believe a transformation of this size and scale will take multiple years and we continue to believe that is the case today."

Yahoo! also announced that it intends to return 50% of the Alibaba initial public offering proceeds to shareholders. Yahoo! and Alibaba agreed that Yahoo! could reduce the number of Alibaba shares it is required to sell in the IPO to 140 million, down from 208 million. The Internet media company holds a total of 523.6 million shares in Alibaba.

Following the earnings release, analysts on Wall Street were largely cautious, noting the company was in a turnaround mode but still questioning Yahoo!'s core business. Here's what a few of them had to say:


JMP Securities analyst Ronald V. Josey (Market Perform, No PT)

"While there are pockets of improvement across Yahoo!'s core business (e.g., Search & Stream Ads), we believe display results suggest Yahoo! remains in turn-around mode and that programmatic is easier said than done; we remain on the sidelines as we look for continued traction in Yahoo!'s core business. "

Piper Jaffray analyst Gene Munster (Overweight, $44 PT)

Overall, we believe shares of YHOO will react positively on the company's report. While the company guided down and posted particularly disappointing display revenue, the company's agreement with Alibaba to reduce the number of shares it will sell at the IPO should outweigh the unsurprising performance at the core. Additionally, we believe the company's statement that it will return at least half of the post-tax proceeds from the sale of Alibaba shares at IPO to investors should answer one of the core questions we were hearing from investors. We view the next catalyst on YHOO as Alibaba's IPO. Based on comments from Yahoo! management, it seems likely that Alibaba will go public in the next 2-3 months (i.e., before Yahoo!'s next report). We continue to believe investors should own YHOO ahead of the Alibaba IPO.

Bank of America Merrill Lynch analyst Justin Post (Potential Buy, $39 PT)

"Results and tax commentary was disappointing, and we are lowering our PO to $39 from $40, representing a lower value for Yahoo's core business (to $6 from $7). Our projected Alibaba IPO valuation is $150bn in our SOP model, and projected Alibaba trading valuation remains at $177bn, which assumes a 29x multiple on projected 2015 net income. While we think an IPO filing with a conservative price range could be a negative catalyst, we believe the Alibaba trading optimism during the IPO road show could be a positive catalyst for Yahoo stock."

BernsteinResearch analyst Carlos Kirjner (Outperform, $40 PT)

"The results and guidance suggest strongly that the core business challenges continue and (at least currently) seem worse than what we had expected. The deterioration of the display business revenue trajectory and the meagre growth in search, which continues to lose share as its growth is significantly slower than the market's illustrate these challenges. It is hard to imagine the core turning around and showing sustained, significant (e.g., mid-tohigh-single digits) revenue and EBITDA growth anytime in the next twelve months. Given the nature and tone of management's comments, it may be even longer. We suspect that were it not for the tremendous appreciation of the value assigned to Yahoo!'s stake in Alibaba, there would be much greater pressure on the management team as the core's performance has languished for two years."

--Written by Kathryn Mykleseth in New York

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