Yahoo! – Purple rain

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Yahoo!’s assets and its few remaining loyal employees are bleeding purple.

• Yahoo! is still profitable but it seems to be slowly bleeding to death as the falling appeal of its assets has caused traffic to fall which can only mean further revenue declines.
• This comes on top of some of the worst disharmony inside Yahoo! that I have ever seen, explaining why there is no plan to fix the current problems and return this company to growth.
• On top of a large number of executive exits, I understand that both morale and belief in the company have plummeted
• These problems are so acute that RFM calculates that Yahoo!’s lack of a mobile strategy is costing the company $2.5bn per quarter in lost revenues. (see here).
• This means that Yahoo! is failing to monetise 90% of the opportunity it has and that the entire company’s revenues are only 31% of what they should be.
• The biggest problem remains execution.
• When Marissa Mayer joined Yahoo! in 2012 she knew exactly what she had to do and in the next 18 months she built a good series of assets that could have been welded together into and ecosystem.
• However, in true Yahoo! style (remember Flickr) very little has been done with these assets to make them onto something that is unique and enticing to users.
• It is the ecosystem that lies behind the growth and profitability of Apple and Google and it is Yahoo!’s failure to properly enter this space that has put it in its current predicament.
• An ecosystem requires an integrated series of services that are easy and fun to use and with a user identifies as being a unique place to live his digital life.
• Instead what Yahoo! has is a jumble of assets and online brands that have been left virtually untouched since their acquisition.
• A quick look at comScore and the Apple App. Store reveals the extent of some of the damage.
• Traffic to its fashion segment and to Yahoo! Screen is down around 50% YoY while its top app., Yahoo Mail, languishes at No. 84 and is the only app. in the top 100.
• I understand that traffic to many of its other properties is also in negative territory.
• The net result of this can only be further declines in revenue as traffic is the life blood of any internet business based on advertising.
• Yahoo! is currently valued at $30bn with $5.5bn in net cash giving an enterprise valuation of $24.5bn.
• Its stakes in Alibaba and Yahoo Japan are worth $38bn alone which if I spin-off and tax at 30% (an unlikely outcome) still gives me value of $26.6bn.
• This means that the market is assuming that Yahoo! itself has negative value of at least $2.1bn.
• The way that things are going, it looks very much as if plenty more value destruction is to come before shareholders really take matters into their own hands and force a shake-up.
• I see the value in the shares but this has all the hallmarks of a classic value trap.