Yahoo! There's Value

By Ben McClure | October 24, 2008 AAA

Yahoo (Nasdaq:YHOO) shareholders have a lot to yell about. Shares of the internet company are now priced at $12.50 a piece. That's a far cry from a few months ago when Microsoft (Nasdaq:MSFT) was offering to buy Yahoo for $33 per share. Prior to third quarter earnings late Tuesday, Yahoo was down 55% over the year as investors worried about falling online ad revenue. That's no surprise - recessions tend to dampen advertisers' spending habits, but investors have probably pushed too far.

Yahoo will struggle over the coming quarters, but it looks cheap at these prices.
(To learn more about how this economic cycle affects both big and small businesses, read The Impact Of Recession On Businesses.)

Q3 Low Lights
Of course, things look pretty bleak for the struggling internet portal. Yahoo said net profit fell 64%, to $54.3 million, or 4 cents a share, from last year, on a 1% increase in gross revenue, to $1.79 billion. Net revenue, after payments to partners for traffic, rose just 3%, to $1.33 billion. Meanwhile,
it's losing more search market share to Google. In September, Yahoo got only 19.4% of U.S. searches, down about 6% from a year ago.

The way I see it, however, the stock is priced for the bargain basement. What's more, there are potential catalysts that could send the stock higher.

Yahoo is sitting on cash and marketable securities worth about $3.3 billion, or $2.37 per share. At the same time, Yahoo owns a big piece of Chinese online ecommerce operation Alibaba and stakes in Yahoo Japan and South Korea's GMarket (NYSE:GMKT). In a letter to shareholders in July, Yahoo management wrote that it was considering a potential spinoff of these Asian assets. Analysts at Canaccord Adams reckon these non-core assets could fetch $5.71 billion or about $4.00 per share.

Yahoo Gets Serious About Cutting Costs
All told, cash from spun-off Asian assets plus what's on its balance sheet would give Yahoo more than $9 billion to pursue strategic acquisitions, or, even better, to repurchase shares or offer a big one-time dividend. Meanwhile, Yahoo's core business would have a market value of $6.13 per share, or just over 1.1 times projected 2008 revenue per share, making it a very attractive investment opportunity on its own.

Yahoo's promise to cut its headcount by 10% didn't come as a surprise, but it does show the company is getting serious about getting costs under control. If management follows through, Yahoo could see big improvements in cash flow and profit margins over in the coming quarters.

There is growing doubt that the regulators will let Yahoo proceed with its advertising outsourcing deal with Google, but the matter is far from dead. If a deal comes to fruition, it could add roughly 6-8 cents to Yahoo's projected 2009 earnings of 52 cents per share.

Bottom Line
Yahoo
certainly won't escape the downturn unscathed, but investors may be too gloomy about what it's worth. For investors willing to take on some risk, it could be a gift.

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