Yahoo Q2 16A – Slough of despond

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Another quarter marred by more of same. 

• Yahoo reported another dismal quarter where it badly underperformed both its peers, Google and Facebook, as well as its potential in mobile.
• Q2 16A revenue-ex TAC / adj-EPS were $841m / $0.09 compared to consensus at $840m / $0.10 as the core business continued to decline with mobile unable to make up the difference.
• Display and search revenue both declined while mobile was only able to grow 3% YoY.
• The only bright spot was advertising revenue driven by Yahoo Mail which further underlines that e-mail is rapidly becoming the only Digital Life service where Yahoo has real traction.
• The majority of this traction is still coming from fixed internet where it is clear that there is very little growth.
• When I take these results and compare them to Google, Facebook or even Twitter, the extent of Yahoo’s underperformance becomes clear.
• This is further highlighted by the fact that I think that Yahoo should be earning over $2bn in revenues per quarter from mobile devices but its Q2 16 revenues were a tiny fraction of that ($259m).
• I am expecting that most of Yahoo’s peers will report good results showing slow growth in fixed but very rapid growth in mobile.
• In contrast Yahoo has reported declines in fixed and pedestrian growth in mobile underlining the extent of its failure to execute on the opportunity before it.
• Fortunately for the share price, the story remains very much about the sale of the core business and on that basis it is not difficult to make the case for Yahoo.
• I am pretty cautious on the outlook for Alibaba but even including that, it is not difficult to value Yahoo at $43 per share (currently $38) with upside to $51 per share if my view on Alibaba is wrong (see here).
• Unfortunately, the sale of Yahoo’s core assets is dragging on and both management and the board are making heavy weather of assessing and selecting bidders for its business.
• Verizon is still expected to come out on top and I continue to expect a sale price of around $3bn.
• Consequently, it is very difficult to have a negative view on Yahoo as it still trades at a significant discount to the sum of its parts.
• That being said I would feel much more comfortable with Baidu, Microsoft or Samsung for the short-term and Facebook or Apple for the longer-term.