With the recent U.S downgrade, continued turmoil throughout the Middle East, unbending Eurozone debt concerns, rumors about France losing its AAA rating and a falling stock market hovering around a 12-month low, perhaps this is not the ideal time to speculate about value stocks - especially ones of struggling technology firms that have lost 25% of their market cap year-to-date. Despite the drawbacks, Yahoo! (Nasdaq:YHOO) shares have emerged as being extremely cheap and are worth some definite analysis.
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Quick Look at Asian Assets
Yahoo respectively owns 43% and 35% of Alibaba Group and Yahoo Japan, amounting to a cumulative investment of $4.2 billion. Part of Yahoo's downward spiral came after the controversy whereby Alibaba, without board approval, transferred ownership of Alipay, an online payment company similar to eBay's (Nasdaq:EBAY) PayPal. However, this issue was somewhat resolved toward the end of July. In its most recent finical quarter, Alibaba generated HK$ 0.105, per diluted share, or 1.3 U.S. cents, which reflected 41.9% year-over-year growth. For the previous 6 months, the Alibaba investment generated $61.9 million on slightly over a billion dollars of revenue. Likewise, Yahoo Japan generated over $2 billion of revenue for Yahoo, providing net income of $512 million. Net income growth in this segment was a modest 7.6%, while revenue remained relatively flat, showing only a 1.9% increase. Within the last six months, Yahoo received $75 million in dividends from Yahoo Japan, net of taxes.
The Sum of the Parts Greater Than the Sum of the Whole
Combining the annualized earnings generated from Yahoo's Asian assets and applying the average S&P P/E ratio of 14.25, suggests a stock price of approximately $12.50, which is near the firm's trading range. Purchasing Yahoo stock would basically result in paying for the Alibaba and Yahoo Japan operations while receiving the core North American business for free. According to an interview conducted by Bloomberg, analysts at Thornburg Investment Management, a privately held investment management company with $83 billion in assets under management, "estimates that Yahoo's Asian assets alone may be worth almost $16 a share." Such a valuation exposes Yahoo to potential takeover speculations as an acquirer can essentially sell off the Asian divisions and maintain the core operation at no cost. The obvious candidate emerging as a potential buyer is Microsoft (Nasdaq:MSFT), which in 2008 offered $31 a share (close to $45 billion) to purchase the struggling search engine. Microsoft currently provides algorithm search technology and paid search services for Yahoo in exchange for 12% of the generated revenue.
Another alternative, naturally, is that the market will simply no longer assign a depressed valuation to the stock. Yahoo is not going the way of Altavista, Excite and other failed search engines who were unable to handle the competition. In its latest "Search Engine Ranking report," Yahoo showed a modest 0.2% increase in internet user penetration while Google (Nasdaq:GOOG) showed a slight market share decline from 65.5% to 65.1%. Yahoo also has some ambitious M&A plans, as it is expected to make a bid for Web TV site Hulu, to compete for online video advertising dollars with YouTube. Unfortunately, Apple (Nasdaq:AAPL), with its $74 billion of cash is rumored to be interested in Hulu as well. Despite criticisms of CEO Carol Bartz, management has taken necessary initiatives to increase shareholder value. For example, after repurchasing 38.6 million shares between January and June, the Board authorized an additional $3 billion for the stock repurchase program.
Although Yahoo lacks the luster of other tech giants such as Google, Apple and Amazon (Nasdaq:AMZN), the company's internal operations should not be discounted.
In comparison to other technology companies, Yahoo trades at a very attractive earnings, sales and economic book value multiples which position the company to as an ideal value play. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)
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