Friday, June 20, 2014

Yahoo -- Interesting Little Company Here

Anybody remember the above yodel?  When I was looking at Yahoo for this post, I remembered their ad campaign from the 1990s when they were the internet site.  

The ArmoTrader has a post up on Yahoo, with the title, Is Yahoo Headed For  Fall?.  While his post is based on a solid technical reading of the chart, I wanted to focus on the more fundamental side of Yahoo.

Let's start with the balance sheet, which is one of the best around.  They had $3.4 billion in liquid assets in 2013, which gives them a liquid ratio over 2.  In fact, their liquid assets (cash and securities) are only about $200 million below their total liabilities, meaning the company is extremely liquid.  Even stripping out goodwill (which I usually do), their "Graham and Dodd" book value is $8.4 billion. 

Then we get to their Revenue Statement, which is where things get, shall we say, interesting.  Revenue has dropped from $4.9 billion in 2011 to $4.6 billion in 2013.  After accounting for expenses, Yahoo's core businesses are creating about $1-$1.3 billion in net cash/year.  And their cash flow statement indicates they've managed their cash position will over the last three years.  They most likely have understood that their net organic growth would be neutral for the foreseeable future.

And then we get to their two big investments: Alibaba Group and Yahoo Japan. Alibaba is a huge online portal that serves China.  Here is a general write-up from the Economist:

Since then, Alibaba has come to dominate internet retailing in China, which will soon be the biggest e-commerce market in the world. It has moved beyond its original remit of connecting businesses to each other to ventures that let companies sell directly to the public (Tmall) and enable members of the public to sell to each other (Taobao). Between them, Taobao and Tmall processed 1.1 trillion yuan ($170 billion) in transactions last year, more goods than passed through Amazon and eBay combined (see table 1).  

The company that started in Mr Ma’s apartment now employs 24,000 workers at its headquarters in Hangzhou and elsewhere; Ms Dai is president of human resources. A few years ago Alibaba began to turn a profit; in the year to September  2012 it made $485m on revenues of $4.1 billion (see chart 2). Following a recent reorganisation it has 25 separate business units, and on May 10th it will have a new chief executive, Jonathan Lu; Mr Ma will stay on as executive chairman.

According to their latest 10-K, Yahoo owns a 24% interest in the company.  Also from their latest 10-K: "Since acquiring its interest in Alibaba Group, the Company has recorded, in retained earnings, cumulative earnings in equity interests, net of tax, of $661 million and $1,078 million as of December 31, 2012 and 2013, respectively. "

Yahoo also owns a 35% interest in Yahoo Japan, which, according to their latest 10-K, "Since acquiring its equity interest in Yahoo Japan, the Company has recorded cumulative earnings in equity interests, net of dividends received and related taxes on dividends, of $2.3 billion and $2.8 billion as of December 31, 2012 and 2013, respectively. "

So, on the domestic front, Yahoo is a stable producer of income.  However, the property is languishing as an undeveloped internet property.   While they were a high-flyer in the original age of the internet, they have since been trading on that fame while not really adapting to the new age.  Yes, they're a landing page for many (myself included), but their lack of revenue growth on the domestic front means they need to change their method of doing business.

However, the are also benefiting from their ownership of Alibaba and Yahoo Japan.  Yahoo Japan's revenue was stable last year, but Alibaba is still a huge growth story.  And while Yahoo isn't a majority owner, their large minority stake means they will participate in the earnings growth.  And, it opens up the possibility of potential business combinations down the road.

So, let's go back to the chart, which does show a potential for a sell-off.  The fundamental reading is Yahoo has some type of long-term value as combination of domestic internet company and international investment in two large markets (Japan and China).  If we do see a sell-off, I certainly wouldn't read it as a crash in the making.