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January 30, 2008
Yahoo: A Valuation Trap?
It's so tempting to jump on Yahoo in here. Whatever your feelings about the search/advertising company's strategic and tactical miscues, or about the problems the company is having coming up with a crisp and coherent plan for where it goes from here, the valuation is awfully compelling.
Consider, Yahoo is trading at a material discount to its peer group on most measures, in particular on earnings. By JPMorgan calculations, it has an after-tax asset adjusted EV/EBITDA multiple of 9.7-times fiscal year 2008 EBITDA, versus a peer group average of 12.1-times. Granted, that's not exactly half-off, but it's darn appealing.
The trouble, of course, is that the valuation could get even more compelling. Given Yahoo's weak guidance for 2008, analysts are hacking big chunks off revenue estimates for the company in 2008, and that's before we get a sense of what is going to happen in online ad markets during this weakening economy, and how that will impact second-tier players. With Efficient Frontier's recent report showing that something like 97% of incremental December ad spend went to Google (see figure below), it's tough not to worry that Yahoo will feel disproportionate pain in a weak market -- which turns into an even more compelling valuation for the company than it currently sports.
As a related aside, I see my friend Mark Mahaney at Citi is out making a similar point this morning. He argues that, with the company guiding to organic growth lower than '06 and '07 levels, and with it upping investment spending in a major way, this cannot be more than a Hold at best. And the only thing keeping Mark from taking it to an outright Sell? The still significant possibility that the company gets bought and broken up for assets.
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paul
i am thinking of starting to accumulate a position for the following reasons. their ownership positions in Yahoo Japan and Alibaba, even if they are widlly overvalued, still are worth a lot of money.
And I think moving all of their search monetization to Google is worth close to $10bn/year which provides a floor/opportunity for a financial buyer.
Of course, if that search traffic starts going down, that value will decline.
I think this company gets sold/broken up/restructured in the next 12 months and whomever does it will make a nice return at today's prices.
Fred
Hey Fred
Agreed, hence my comment above that acquisition/break-up is the floor on the stock. Because only a true optimist can be left looking for Yahoo to save itself -- and, more importantly, shareholders -- absent external forces.
Having worked closely with all 3 platforms Yahoo, MSN / LIVE and Google, I believe both Google and MSN / LIVE will eat into Yahoo market share over the coming years. If you buy into this scenario the price may be right. I am neutral Yahoo and believe the price reflects its future earnings.
Yesterday's conference call proved one thing: Yang and Decker need to go.
YHOO can blame markets and externalities all they want, the problem is with execution and Yang and Decker lying to themselves and to shareholders.
These people are clueless. There's no way YHOO will end the year as an independent company.
Acquisition/break up as a floor is true of any stock. And it was touted back when the stock was 30. MSFT has burned themselves on big acquisitions before. Integration is always a disaster. I don't think they are stupid enough to do it again.
I may have missed this, but what is the consensus on YHOO's breakup value?
Comparing dotcoms based on the bullshit valuation of their peers is, well, bullshit. Doing so only inflates value. I can prove it. Why is that you do not see anyone trying to value Google based on Yahoo's valuation? They are peers, right? Because it's only used as an excuse for overvaluing a dog. Call a dog what it is - a dog.
The lesson of Yahoo is simple: Stanford phd's suck at running media companies. But you needed me to tell you that? I doubt it. The other lesson: don't hire an inflated ego from hollywood or AOL. They suck, too. But you knew that, too, right?
@Fred -- did you pull the trigger ? :)
All these EV/EBITDA calculations take out Yahoo's ownership of Yahoo Japan and Alibaba. The problem with that is those two companies themselves are hideously overpriced. And EV/EBITDA is useful if you can turn off the DA part. I'm not sure you can with their precarious market position.