YHOO - Yahoo Inc.

[txlaw]

Does anybody still own YHOO on the board?  It looks like a nice call option on an Alibaba IPO going gangbusters, along with possible additional value from a turnaround by Marissa Meyer.

 

I actually took a look this past weekend because of the Barron's piece a few weeks ago.  It makes a big difference if you value their Alibaba and Yahoo Japan stakes as pretax or post-tax.  I was conservative using the post-tax numbers and got a price range between $24.80 and $31.30 valuing the Alibaba IPO between $50 Billion and $100 Billion and the core business at 10x Adj FCF.  To me it didn't look cheap enough especially because betting on the Alibaba IPO is like buying the current valuations for Amazon, etc but I could definitely see it happening. Plus, I think Mayer could easily make the core business grow and be worth more than 10x FCF. 

 

If you use the pretax numbers instead my range increases to $31 - $41.  I think its more appropriate to use the liquidation value of the stakes (post-tax) but I was actually considering making a thread asking how people handle this situation when a large equity stake makes up a large portion of the enterprise value (PNC / Blackrock comes to mind).

 

Interesting.  Yeah, I'm wondering what people think the downside case is now.  I used to own YHOO when it was trading a lot lower but sold after the market realized the value of the equity investments.

 

But now I have to revisit because Alibaba may be worth more than I thought it was.

 

I love cases where there is minimal downside and possible (but uncertain) huge upside.

[bmichaud]

Based on where Yahoo! Japan is trading ($16.25ish per ADR), 6X "Core" EBITDA, $70B valuation for Alibaba and a 20% tax rate on the Asian assets, FV is around $32. Assuming a 35% tax rate on the Asian assets, FV is $29, and at 0% it's $37.

 

Alibaba is definitely the wildcard. Eric Jackson sees Alibaba over $100B in a couple of years based on where Amazon trades. But these tech valuations are insane - Alibaba just purchased a stake in "Sina" (China's version of Twitter) at a $3B valuation.....or 100 times earnings!!!!!!!!!!!!!

 

To move significantly higher from here - barring some miraculous transformation into a tech giant - I think several things need to happen:

 

1. A quick, but tax-efficient exit out of the Alibaba stake - I've seen analyses done on the tax part, where Yahoo! could sell a taxable portion into the IPO, but then spin-off the remainder tax-free (hence the 20% average tax rate concept above) - in order to take advantage of the internet stock valuation craze

2. Spin-off Yahoo! Japan

3. A $20B dutch tender at $30 per share

 

The above would free up $26B of deployable cash. Leave $6B for ops and repo 667 million shares, you are left with:

 

Yahoo! Core: 6x $1.6B EBITDA = $9.6B

Cash: $6B

Shares: 436MM

Yahoo! Stub: $35.90 per share

[txlaw]

http://www.bloomberg.com/news/2013-05-07/yahoo-records-273-million-in-gains-from-hedges-on-yen.html

[Guest valueInv]

http://www.bloomberg.com/news/2013-05-07/yahoo-records-273-million-in-gains-from-hedges-on-yen.html

Heh, just initiated a position yesterday.

[txlaw]

http://www.bloomberg.com/news/2013-05-08/yahoo-ceo-mayer-said-to-seek-ways-to-end-microsoft-search-deal.html

[Guest wellmont]

Does anybody still own YHOO on the board?  It looks like a nice call option on an Alibaba IPO going gangbusters, along with possible additional value from a turnaround by Marissa Meyer.

 

I remember this is what people start doing at tail ends of bull markets. they start using "relative" valuations instead of absolute. In other words, if you value Alibaba at an insane valuation, because the market currently is, then you can contort yourself into Yahoo becoming a buy or "value". I don't think Buffett or Klarman do it that way. Rather, I would guess that Buffett would say he has no idea what the value of Alibaba is. And given his discipline, he would never invest in Yahoo under those circumstances.

[Cardboard]

I would be cautious about YHOO now. Some of us talked about it on this site starting in late 2011 if I am not mistaken. The thesis has largely played out IMO.

 

Back then, we were calculating that $22 was about fair value using a reasonable multiple on Yahoo core and a liquidation value for Alibaba and Yahoo Japan after taxes. Don't forget them! Now, people are really enthusiastic. The Alibaba IPO price is still unknown and Yahoo Japan can't be sold easily with the most likely buyer or Softbank trying to absorb Sprint. There also seems to be a ton of excitement around Marissa Mayer, but I have yet to see how Yahoo core is any better today than it was prior to her arrival. Her culture improvements at Yahoo are fine, she looks good and sure helps morale but, where is the increase in sales and earnings? Again, it seems to be a lot of hope about the future getting better or like the Alibaba IPO price.

 

A true value creator would have been a Dutch auction right around receiving the Alibaba proceeds, but it did not happen and buybacks now have limited effectiveness at $26.50.

 

I sold earlier around $20 so call me a fool if you like, but I think that it is more sentiment now driving the stock vs sum of the parts and real intrinsic value.

 

Cardboard

[PlanMaestro]

Nothing to add.

 

I would be cautious about YHOO now. Some of us talked about it on this site starting in late 2011 if I am not mistaken. The thesis has largely played out IMO.

 

Back then, we were calculating that $22 was about fair value using a reasonable multiple on Yahoo core and a liquidation value for Alibaba and Yahoo Japan after taxes. Don't forget them! Now, people are really enthusiastic. The Alibaba IPO price is still unknown and Yahoo Japan can't be sold easily with the most likely buyer or Softbank trying to absorb Sprint. There also seems to be a ton of excitement around Marissa Mayer, but I have yet to see how Yahoo core is any better today than it was prior to her arrival. Her culture improvements at Yahoo are fine, she looks good and sure helps morale but, where is the increase in sales and earnings? Again, it seems to be a lot of hope about the future getting better or like the Alibaba IPO price.

 

A true value creator would have been a Dutch auction right around receiving the Alibaba proceeds, but it did not happen and buybacks now have limited effectiveness at $26.50.

 

I sold earlier around $20 so call me a fool if you like, but I think that it is more sentiment now driving the stock vs sum of the parts and real intrinsic value.

 

Cardboard

[Guest valueInv]

I would be cautious about YHOO now. Some of us talked about it on this site starting in late 2011 if I am not mistaken. The thesis has largely played out IMO.

 

Back then, we were calculating that $22 was about fair value using a reasonable multiple on Yahoo core and a liquidation value for Alibaba and Yahoo Japan after taxes. Don't forget them! Now, people are really enthusiastic. The Alibaba IPO price is still unknown and Yahoo Japan can't be sold easily with the most likely buyer or Softbank trying to absorb Sprint. There also seems to be a ton of excitement around Marissa Mayer, but I have yet to see how Yahoo core is any better today than it was prior to her arrival. Her culture improvements at Yahoo are fine, she looks good and sure helps morale but, where is the increase in sales and earnings? Again, it seems to be a lot of hope about the future getting better or like the Alibaba IPO price.

 

A true value creator would have been a Dutch auction right around receiving the Alibaba proceeds, but it did not happen and buybacks now have limited effectiveness at $26.50.

 

I sold earlier around $20 so call me a fool if you like, but I think that it is more sentiment now driving the stock vs sum of the parts and real intrinsic value.

 

Cardboard

 

Its all in the products, products, products.

[txlaw]

Nothing to add.

 

I would be cautious about YHOO now. Some of us talked about it on this site starting in late 2011 if I am not mistaken. The thesis has largely played out IMO.

 

Back then, we were calculating that $22 was about fair value using a reasonable multiple on Yahoo core and a liquidation value for Alibaba and Yahoo Japan after taxes. Don't forget them! Now, people are really enthusiastic. The Alibaba IPO price is still unknown and Yahoo Japan can't be sold easily with the most likely buyer or Softbank trying to absorb Sprint. There also seems to be a ton of excitement around Marissa Mayer, but I have yet to see how Yahoo core is any better today than it was prior to her arrival. Her culture improvements at Yahoo are fine, she looks good and sure helps morale but, where is the increase in sales and earnings? Again, it seems to be a lot of hope about the future getting better or like the Alibaba IPO price.

 

A true value creator would have been a Dutch auction right around receiving the Alibaba proceeds, but it did not happen and buybacks now have limited effectiveness at $26.50.

 

I sold earlier around $20 so call me a fool if you like, but I think that it is more sentiment now driving the stock vs sum of the parts and real intrinsic value.

 

Cardboard

 

I think you guys are right to be cautious and that FV at $22 is not an unreasonable assessment given the current outlook. 

 

But I view this as a low downside, potential high upside trade, dependent on the Alibaba IPO valuation being crazy like AMZN and a possible turnaround through better monetization of the products/services, partnerships with people like Apple (hopefully), and M&A that makes sense (maybe Hulu makes sense -- maybe not).  We'll have to see how Mayer performs.

 

I don't expect to lose much here, so I'm willing to allocate a small amount of my portfolio to the company.  I expect to monitor YHOO very closely and could easily sell out completely on new developments that I think are value destroying.

[bmichaud]

Call me crazy, but I believe YHOO is potentially just as interesting here at ~$27 as it was at ~$16.

 

1. Alibaba valuation now comfortably around $100B v. $50B in 2011/early 2012 - Stifel values Alibaba at 25X 2016 earnings ($180B valuation) and discounts it back 20% per year to get to $100B today. Seems reasonable to me given the outrageous growth potential Alibaba has....

 

2. Yahoo! Japan is trading at $16 per ADR versus less than $12...

 

3. YHOO has a USD/JPY hedge on to the tune of something over $3B....

 

4. Mayer is firmly committed to not making a "big splash" acquisition, the rumor of which drove the stock down from $16.30ish to below $15....

 

5. Core operations generate $1.794B of projected 2014 EBITDA - this should be valued at 6X (AOL's multiple) today, and perhaps it is worth upwards of 10X in a NewsCorp/Disney/MSFT/Apple etc... etc... take-over?

 

If YHOO's Asian assets are treated as "cash" in a net debt calculation, at a 35% tax rate on the Asian assets YHOO has upwards of $26B of debt capacity - it can virtually take itself private.

 

If a 17.5% tax rate is assumed on the Asian assets, the debt capacity is in the mid-$30Bs. At a 30% premium to $27 per share in a Dutch Tender, YHOO is left with fewer than 200MM shares outstanding.

 

Third Point got into YHOO at around $13 (and has bought up to $16 I believe) - so the position has doubled...it is the largest position in the fund, and I personally do not believe they would put on such a large bet for a mere double. Loeb is not dumb - the financial engineering potential for YHOO is absolutely phenomenal, and I don't see how Third Point would pass up such an opportunity.

 

Not to mention, YHOO will hold a 12% stake in Alibaba post-IPO, which should grow to $180B from the current estimated $100B.

[PlanMaestro]

http://blogs.ft.com/beyond-brics/2013/05/14/alibaba-master-of-the-treasure-cave/#axzz2TGvxcPOw

[writser]

Yahoo has agreed to pay $1.1 billion in cash for the company, one of the people said. Tumblr would continue to operate largely as an independent business, the people said.

 

http://online.wsj.com/article/SB10001424127887324787004578493130789235150.html?mod=WSJEurope_hpp_LEFTTopStories

[Guest hellsten]

Yahoo has agreed to pay $1.1 billion in cash for the company, one of the people said. Tumblr would continue to operate largely as an independent business, the people said.

 

http://online.wsj.com/article/SB10001424127887324787004578493130789235150.html?mod=WSJEurope_hpp_LEFTTopStories

 

My first thought when I saw this was that Yahoo is buying another Geocities (http://en.wikipedia.org/wiki/GeoCities) :o

 

In January 1999, near the peak of the dot-com bubble, GeoCities was purchased by Yahoo! for $3.57 billion in stock, with

Yahoo! taking control on May 28.

 

History sure does rhyme:

Tumblr generated $13 million in revenue last year.

 

My second thought was that they probably bought the Tumblr team, because who would pay 1 billion for 100 million typing monkeys?

[luck]

if yahoo cuts the chord with poorly performing microsoft search deal, anyone have any idea if they can now get past the antitrust issues somehow with a google partnership? 

 

This article seems to think not:  http://money.cnn.com/2013/05/10/technology/yahoo-microsoft/index.html

 

Could they partner with Facebook or someone else?  Thx in advance for your responses. 

 

[Guest wellmont]

Yahoo has agreed to pay $1.1 billion in cash for the company, one of the people said. Tumblr would continue to operate largely as an independent business, the people said.

 

http://online.wsj.com/article/SB10001424127887324787004578493130789235150.html?mod=WSJEurope_hpp_LEFTTopStories

 

My first thought when I saw this was that Yahoo is buying another Geocities (http://en.wikipedia.org/wiki/GeoCities) :o

 

In January 1999, near the peak of the dot-com bubble, GeoCities was purchased by Yahoo! for $3.57 billion in stock, with

Yahoo! taking control on May 28.

 

History sure does rhyme:

Tumblr generated $13 million in revenue last year.

 

My second thought was that they probably bought the Tumblr team, because who would pay 1 billion for 100 million typing monkeys?

 

who would pay $1.1b for a "team"? especially a team that after years has produced only $13m of revenue. this is a case of a ceo who wants to be relevant, get in the "game", grow, and get more "scale". it would be interesting to see if LOEB voted for this deal.

[Guest valueInv]

Yahoo has agreed to pay $1.1 billion in cash for the company, one of the people said. Tumblr would continue to operate largely as an independent business, the people said.

 

http://online.wsj.com/article/SB10001424127887324787004578493130789235150.html?mod=WSJEurope_hpp_LEFTTopStories

 

My first thought when I saw this was that Yahoo is buying another Geocities (http://en.wikipedia.org/wiki/GeoCities) :o

 

In January 1999, near the peak of the dot-com bubble, GeoCities was purchased by Yahoo! for $3.57 billion in stock, with

Yahoo! taking control on May 28.

 

History sure does rhyme:

Tumblr generated $13 million in revenue last year.

 

My second thought was that they probably bought the Tumblr team, because who would pay 1 billion for 100 million typing monkeys?

 

who would pay $1.1b for a "team"? especially a team that after years has produced only $13m of revenue. this is a case of a ceo who wants to be relevant, get in the "game", grow, and get more "scale". it would be interesting to see if LOEB voted for this deal.

 

They are supposed to be on track to make $100M this year. Yahoo should be able to scale that up even further. Tumbler is a very interesting company. I remember reading somewhere that they were getting even more traffic than Twitter. What surprises me is that Google or FB didn't sweep in and buy the company.

 

Marissa is make some interesting moves on the product side, I am  seeing some big improvements. I still haven't seen many moves on the monetization side. Given that she understands Google well, I would think she has something in store.

 

I am tempted to buy more.

[Guest wellmont]

you don't mean profit. You mean revenue. They are on schedule to "make" $100 in revenue this year. my understanding that much of tumblr is adult content. wonder how yahoo is going to deal with that. yes you do wonder why fb or goog did not buy tumblr first. this is such a crap shoot kind of business that isn't even making money now. there is zero idea where the users are going to be in 2 years.

[Palantir]

I thought Marissa was a tech visionary who was going to revolutionize the web. Just wait until Tumblr is replaced by some new startup.

 

 

 

I think I should start a startup and sell it for a billion dollars. Anyone have any ideas?

[Guest valueInv]

you don't mean profit. You mean revenue. They are on schedule to "make" $100 in revenue this year. my understanding that much of tumblr is adult content. wonder how yahoo is going to deal with that. yes you do wonder why fb or goog did not buy tumblr first. this is such a crap shoot kind of business that isn't even making money now. there is zero idea where the users are going to be in 2 years.

 

So is Instagram. IIRC, so was YouTube . You think Yahoo didn't think about this?

[collegeinvestor]

Broadcast.com----now this  8)

[Guest valueInv]

Broadcast.com----now this  8)

 

Heh, the Hippo article is looking pretty good now.

[Guest hellsten]

who would pay $1.1b for a "team"? especially a team that after years has produced only $13m of revenue. this is a case of a ceo who wants to be relevant, get in the "game", grow, and get more "scale". it would be interesting to see if LOEB voted for this deal.

 

Yahoo bought:

1. the team

2. the growth

3. the content, including "Raccoon Sex Dungeon": http://www.explainxkcd.com/wiki/index.php?title=1025:_Tumblr

4. a social network (similar to Myspace)

5. intangibles like the retention rate:

It’s estimated that Twitter has a retention rate of around 40%, compared to over 80% for Tumblr. These figures date from 2009, but they’re still indicative of what the future may hold for Twitter – retention is the key to any social networking platform’s long term success.

http://thenextweb.com/socialmedia/2010/11/06/can-tumblr-topple-twitter/

 

Anyway, IMO, they didn't buy a company with a moat such as YouTube or Facebook.

 

I wouldn't trust Marissa Mayer with my money. CEOs of tech companies are not value investors. They are more like VCs. The returns are probably the same, in other words really bad on average. According to Fred Wilson — who invested in both Geocities and Tumblr — they underperform the index:

http://www.avc.com/a_vc/2013/02/venture-capital-returns.html - Venture Capital Returns

 

Fred Wilson was denying Tumblr is Geocities already 6 months ago (tech journalism is really bad, but that's another topic):

http://gigaom.com/2012/11/07/is-tumblr-the-new-geocities-vc-fred-wilson-says-no-points-to-ads/

 

Fred's first comment after the article makes sense. Yahoo's 1 billion acquisition doesn't (IMHO).

[Guest wellmont]

you don't mean profit. You mean revenue. They are on schedule to "make" $100 in revenue this year. my understanding that much of tumblr is adult content. wonder how yahoo is going to deal with that. yes you do wonder why fb or goog did not buy tumblr first. this is such a crap shoot kind of business that isn't even making money now. there is zero idea where the users are going to be in 2 years.

 

So is Instagram. IIRC, so was YouTube . You think Yahoo didn't think about this?

Instagram? Youtube worked. But the CEO of tumblr is on record as saying display advertising at tumbr won't work. it would turn off their users. so monetization is going to be extremely slow till they figure it out. the fact is that these kind of deals are dice rolls. it's very fun for CEOs, CNBC and the twitiverse. But shareholders?

[hyten1]

hope tumblr is not another geocities

 

many similarities