Yahoo! – Out of options

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Yahoo! seems determined deliver Alibaba at any cost.

• There is so little good news coming from Yahoo! these days that it appears to feel that it must complete the spin-off of Alibaba to shareholders, even if it results in a big tax bill for investors.
• To me, this is an indication that there continues to be no progress on the turnaround and therefore substantial pressure to deliver something.
• Not only has the IRS declined to rule on the spin-off but it has also said that any guidance it gives in the future will not apply retroactively to transactions that are completed in the past.
• Consequently, there is now the risk that anything up to 30% of the value of the Alibaba investment may go to the IRS rather than shareholders of Yahoo!
• I think that the reasonable move would be to put the transaction on hold until there is clarity on how it will be treated for tax as this has the best outlook for preserving value for shareholders.
• The problem is that for the last 2 years there has been so little progress at Yahoo! other than the Alibaba investment, and a delay here would clearly put the focus back on the company’s lack of execution.
• I think that this is something the company cannot afford as I continue to believe that Yahoo! is squandering a huge proportion of the opportunity that it has in mobile.
• At its Q2 15A results, Yahoo! claimed to have 600m monthly active users on mobile which translated into $252m in revenues (ex-TAC).
• Yahoo! has excellent coverage of Digital Life (73%), thanks to its acquisition spree, meaning that its addressable market is not dissimilar to that of Google.
• With 63% coverage of Digital Life, RFM estimates that Google generated $2.63bn in revenues from 749m users of Android devices.
• If I assume that Yahoo! had executed on its assets as well as Google, then Yahoo! should have generated something like $2.5bn in revenues from mobile in Q2 15A.
• In a nutshell Yahoo!’s poor execution in mobile has meant that it has missed out on 90% of the monetisation opportunity from mobile devices.
• I think that this is because its users on mobile use it for very simple things like checking email and news and do not engage with Yahoo! as an ecosystem.
• Until Yahoo! makes its mobile assets engaging, consistent and integrated, users are unlikely to care meaning that its revenue opportunity will continue to be taken by competitors.
• The result is a company that feels under pressure to deliver something to investors even if that means that a large portion of that value is lost.
• There is no sign that the underperformance of Yahoo! is coming to an end as execution in mobile remains very disappointing.
• For the ecosystem, I prefer Microsoft and might even be tempted to have a look at Samsung where I think the worst of the problems have now passed.