Despite large holdings Alibaba Group Holdings Ltd. (NYSE: BABA), stock in Yahoo! Inc (NASDAQ: YHOO) has only returned 8% over the last ten years. Poor operational performance led to low valuations, and the company was left behind during the recovery from the 2008 market crash. Speculation regarding a turnaround plan, restructuring and sale of equity interests fueled Yahoo share price fluctuations between 2006 and 2016. ON July 24, Verizon announced that it had agreed to buy Yahoo's core operations for $4.8 bn.
Stock Price History
Yahoo's shares only appreciated 8% from $33 in June 2006 to $36 in 2016, and there was significant volatility in the interim. During the 2008 crash, the stock bottomed out around $9, losing roughly 75% of its value. Recovery saw appreciation to $18.65 in 2011, still well below pre-recession levels. Shares traded sideways from that point until late 2012, when the stock began a two-year charge to decade-long highs. After some stagnation in early 2014, Yahoo stock reached $51.75 in November. 2015 was a period of steady decline, and shares dropped below $30 before recouping losses in 2016.
Yahoo had a difficult time sustaining growth and generating profits throughout much of the period between 2006 and 2015. Intense competition and questionable acquisitions drove substandard results and led investors to question Yahoo's corporate leadership. With the exception of 22% year-over-year (YOY) top-line expansion in 2006, Yahoo's revenue growth was either modest or negative for each full year. Growth never topped 8.5%, while contraction occurred in five separate years. Sales dropped 21.2% in 2011. The 10-year average sales growth rate was -0.56% as of December 2015.
Meanwhile, Yahoo's gross margin and operating margin were volatile. Gross margin dipped to 55.5% in 2009, climbed to 71.9% in 2014 and fell back to 58.2% in 2015. The decline in margin for 2015 was attributed to high traffic acquisition costs related to an agreement with Mozilla. Research and development (R&D) expenses have steadily risen relative to sales, further depressing operating margins, as competition necessitates expansion and improved offerings. Selling, general and administrative costs (SG&A) have also not been reduced relative to sales. Operating income has ranged from $13 million to $800 million, with an operating loss of $4.4 billion in 2015 reflecting nonrecurring noncash charges related to goodwill impairment and restructuring.
Yahoo generated significant nonoperating income from its investments in unconsolidated entities. Yahoo owned roughly 15% of the Chinese e-commerce company Alibaba as of December 2015 and 35.5% of Yahoo Japan Corporation. These have contributed heavily to Yahoo's net earnings. Earnings in equity interests net of tax on the income statement was $897 million in 2013, $1.06 billion in 2014 and $384 million in 2015. Yahoo's valuation has at times reflected no implied value for its core operations, according to the market value of its stake in publicly traded companies. These holdings are therefore essential to analyzing Yahoo's share price.
Influence of the Equity Market
Yahoo has exhibited a positive correlation to popular benchmark indexes, but the similarities have been limited. The Standard & Poor's (S&P) 500 Index grew 66.2% from June 2006 to June 2016, while the SPDR Technology Sector Select exchange-traded fund (NYSEARCA: XLK) grew 115%. Yahoo stock underperformed going into the 2008 crash, did not recover as quickly as the benchmarks and then faltered again in 2015 while the market was flat to slightly down.
Yahoo's two periods of superior performance occurred in 2013 and the fall of 2014. 2013 marked a period of strong equity market growth, but the company's turnaround plan and acquisition of Tumblr generated optimism about the future of the beaten-down stock. Activist investor Starboard Value LP put pressure on Yahoo to restructure and spin off assets starting in the fourth quarter of 2014, giving market participants hope that value could be unlocked by separating Yahoo's undervalued businesses.
Yahoo's correlation coefficient relative to the SPDR Technology Sector Select ETF was 0.465 over the decade, with a similar level of correlation to the S&P 500 Index. It is a high beta stock with complicated and volatile fundamentals, causing it to diverge from market performance. The charts for Yahoo stock and Alibaba stock are almost identical from January 2015 through June 2016.