Yahoo – Fire sale

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Long-term investors pay heavily in lost opportunity.

• Only in the context of Yahoo’s awful execution over the last 4 years can the sale of its operating business be called a good deal for investors.
• Yahoo has agreed to sell its operating businesses excluding cash, patents and investments to Verizon for $4.83bn in cash which is expected to close in Q1 17.
• This is higher than I had been anticipating ($3bn) and in that context (see here), I can raise my valuation of Yahoo from $43.3 per share to $45.2.
• This is also assuming that my bearish view on Alibaba (see here) is correct.
• If I use the current share price of Alibaba, then my current valuation of Yahoo is $54.6 some 43% above the current share price of $38.3.
• Hence for those that are considering buying Yahoo’s shares now for a quick profit, things are looking good but I think that long-term Yahoo investors are faring very badly.
• This is because for the last 4 years Yahoo has had a huge opportunity to migrate the substantial traction that it has in fixed internet into mobile.
• However, through poor execution, I think this opportunity has been completely squandered.
• Even without games, Yahoo still has 41% coverage of the Digital Life pie and it claims to have 600m monthly active users.
• If I take these figures and apply them to RFM’s monetisation model, I estimate that if Yahoo had executed as well as Google, Facebook or Twitter, it should have generated $2.1bn in revenues from mobile devices alone in Q2 16A.
• In reality, Yahoo generated revenue of $259m from mobile, just 12% of its potential, highlighting just how badly Yahoo has failed to address mobile correctly.
• If this potential had been fulfilled, then I think that Yahoo’s core assets could easily have been valued in excess of 10x the price that Verizon is paying for them.
• This is why I think that long-term Yahoo shareholders have paid dearly for the missteps of the current management team and why this fire sale can be of little consolation.
• I doubt that Verizon will able to do much better with these assets and in that context Google and Facebook can focus on competing against each other in mobile and not worry too much about Yahoo.
• I still think that Yahoo shares will end up trading meaningfully higher than where they are today based on the sum of its parts and so it is worthy of consideration from that perspective.
• Elsewhere, Baidu, Microsoft and Samsung remain my top short term picks but I am keeping a very close eye on Tencent and Facebook where I am looking for the right time to enter.
• I remain negative on Alibaba, Google and Twitter.