Yahoo! Should Split Into Yahoo!, Yahoo! Japan and Yahoo! Alibaba

NEW YORK (TheStreet) -- The Google Gal is struggling at Yahoo! (YHOO). Her enthusiasm is gone. Her optimistic tone has disappeared. She was forced to eat crow and admit the promise of growth in 2014 was a pipe dream. Marissa Mayer's turnaround plan for Yahoo has hit a brick wall.

This second quarter report of revenue and profit decline marks a step in the wrong direction after a decent first quarter. Yahoo's future as a mobile advertising firm is now up for debate. Premium advertisers tightened up budgets as the average price for Yahoo ads declined by a whopping 24% compared to a 5% decline three months earlier; revenue from display advertising dropped 6.9%. This is a tech company without a growth identity.

Investors have lost count of how many acquisitions Mayer has made over the last two years but it's somewhere around 40. None of them have made a difference to Wall Street. The big bet on Tumblr has failed to evolved into Yahoo's version of YouTube. With no growth anywhere on the horizon this has quickly become a desperate time for the company, you know what they say ... desperate times call for desperate measures. And that's exactly what we expect to happen in coming months.

Yahoo!'s Alibaba Cash Could Trigger a Buying Binge in Tech

Has Marissa Mayer Done Enough?

It's curious that Alibaba would agree to let Yahoo hang on to additional shares after the IPO. Instead of selling 40% of its stake, Yahoo negotiated to only sell 27% of its stake. To our knowledge Alibaba didn't get anything in return, Jack Ma simply said yes to the proposal.

Why? It likely has to do with tax payments and an eventual acquisition of Yahoo by Alibaba. Why give the proceeds to Uncle Sam when it can be kept on the books to appreciate? This makes sense for Ma only if he views Yahoo's stake in Alibaba as his own.

What might the acquisition look like? Yahoo's current market cap is at $34.2 billion; after the IPO the company will have somewhere around $7 billion in cash on its books, its core business generates over $1 billion in annual profits, it's Yahoo Japan stake is valued near $11 billion, and it will still own 16.8% of Alibaba which translates to a $33.6 billion valuation if Alibaba's total valuation reaches $200 billion.

This puts Yahoo's book value somewhere around $55 billion which presents a nice disconnect for Jack Ma to take advantage of considering the current market cap is $34.2 billion and Ma can probably purchase the company for somewhere between $40 billion and $45 billion. A $45 billion market cap translates into a $44.55 stock price which is a significant premium to the current price at $34.

Is Mayer desperate enough to unlock shareholder value? If I was Yahoo CEO for a week my first order of business would be to break up the company into shares of Yahoo, Yahoo Japan and Yahoo Alibaba.

My second order of business would be to sit down with Jack Ma and find out what parts of Yahoo he wants to buy.

My third order of business would be to go all-in on Yahoo Screen by acquiring live content to go with the live concerts from Live Nation. The cord cutting revolution is just underway but live content remains scarce.

Yahoo should acquire exclusive rights to as much live news and sports content as it can get. Let Netflix be the video library. Let Youtube be the site for user generated content. But establish Yahoo as the web portal for live video streaming. The NBA's television contract with ESPN (Disney (DIS)) and TNT (Time Warner (TWC)) expires in the 2015-2016 season.

Rumors suggest the NBA contract can be had for just under $1 billion per year. Yahoo should aggressively go after it. NFL television contracts with run through 2021-2022. In total the four networks contribute $5 billion to $6 billion annually to the NFL. Yahoo should be prepared to bid aggressively for the NFL in 2021. Yahoo recently acquired HD streaming company RayV which is a viable platform for these kinds of endeavors. The ad dollars for Yahoo's same old services aren't there anymore.

It's time for Marissa to be bold. It's time to throw the old playbook out the window. Yahoo needs to do something big if it wants big results. As investors, we view this period of desperation as a buying opportunity in front of the Alibaba IPO. Yahoo!'s trading range continues to hold at the $33 bottom, at the next sign of an uptick in price action we plan to initiate a position. We're about to see what Marissa Mayer is made of.

At the time of publication the author held no positions in any of the stocks mentioned.

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 multiple 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 31.51%, 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 ($1.62 versus $1.26).

Jason Schwarz
no positions in YHOO

More from Opinion

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Apple Needs to Figure Out Its Self-Driving Vehicle Strategy

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

Throwback Thursday: Tesla, Chip Stocks, TheStreet's Picks

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

12 Stocks That Our Writers and Their Sources Recommend You Buy Here

Musk Goes on Unoriginal Media Tirade

Musk Goes on Unoriginal Media Tirade

What's Happening in Video Games This Week: On the Road to E3

What's Happening in Video Games This Week: On the Road to E3