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.
TUTORIAL: Managing Risk And Diversification

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.

Continued Progress
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.

Bottom Line
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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!