Yahoo! – Extended sentence.

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Investors are sentenced to another year of fumbling and uncertainty.

• Yahoo!’s management appeared weary and browbeaten when it announced that instead of spinning out Alibaba, it would spin out everything else leaving Alibaba alone inside the old company.
• The rationale behind this change is simply that spinning Alibaba carries a risk of substantial taxation while doing the opposite does not.
• The problem is that spinning out the core assets is much more complicated which condemns investors to another year of waiting to realise the value that obviously does exist inside this company.
• As things stand today, the core business of Yahoo! is valued at zero when taking the value of its investments in Alibaba and Yahoo Japan into account.
• This business may not be growing and may be suffering from very poor execution, but it remains profitable and cash generative.
• Even if nothing happens and Yahoo! has its lunch slowly eaten by Google, Facebook et al, the core business is still worth much more than zero.
• This is because it could be managed for oblivion with costs being trimmed to match the revenue declines and extracting as much cash as possible.
• The problem is that Marissa’s track record over the last three years has been awful.
• She has invested substantial amounts of money in assets to bring the company back to growth but still revenues chug along at around $1bn per quarter.
• Investors fear that money will continue to spent on investments that fail to rescue the company and in a very extreme case, the core business could in theory be worth zero.
• This likely to be very far from reality but with another year of uncertainty ahead, the outlook remains very weak.
• This is because, Yahoo! is still massively underperforming its potential and is struggling to hold onto its executives.
• Yahoo! has a leading position in Digital Life which combined with its 600m mobile users should be generating $3,923m in mobile advertising revenues per quarter.
• Unfortunately, in Q3 15A Yahoo delivered $271m in mobile revenues underperforming its potential by 93%.
• To make matters worse, management appeared to be content with this figure leading me to believe that it does not really understand what it should be doing nor how it should be doing it.
• The reason for this underperformance is clear.
• It has all of the assets to create a vibrant and thriving ecosystem but it has failed to put the pieces together.
• Consequently, Yahoo! scores very badly on RFM’s 7 Laws of Robotics measures which assess the quality and appeal of a digital ecosystem.
• The realisation of this potential will take superb execution followed up with ingenious marketing, neither of which the current management team seem capable of.
• I think a management change is on the cards and Marissa’s upcoming maternity leave offers her an opportunity to make a quiet and graceful exit.
• I have no doubts that this would be well received with the shares regaining a little value for the core business.