Yahoo! Q3 – The waiting game

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Alibaba is flying. Core business is waiting.

  • Yahoo! reported reasonable Q3 results which where more driven by events at Alibaba than by the progress being made on the core business.
  • Q3A Revenues / EPS were $1.08bn (ex-TAC) / $0.34 which was broadly in line with estimates at $1.08bn / $0.33.
  • Forecasts were soft with Q4E revenues  (ex-TAC) of $1.18bn-$1.22bn and full year 2014E revenues of $4.40bn-$4.45bn expected.
  • This is somewhat light compared to forecasts of $1.25bn and $4.48bn respectively.
  • At Alibaba, business is continuing to develop very favourably where the user base has doubled in the last year and profits are up threefold.
  • Furthermore, the terms of Yahoo!’s relationship with Alibaba have been changed to be more in Yahoo!’s favour.
  • The number of shares the company is required to sell at the IPO has been reduced from 261.5m to 208m.
  • This effectively increases the stake that Yahoo! can hold post-IPO meaning that it will have a greater participation in the widely expected upside that is expected.
  • This was the main driver of the after hours rally in the share price rather than any sudden improvement in the underlying business.
  • Here, the company is clearly still being forced to play the waiting game.
  • Investments are being made, traffic is starting to move in the right direction but revenue has yet to follow.
  • This is the rather frustrating waiting game that Yahoo! has to play as there is always a lag between traffic increases and revenues.
  • Market share in advertising will probably be lost again over the balance of 2013, but I am hopeful that the exit run rate figures will paint a better picture for 2014.
  • I put very little stock in Yahoo!’s user metrics as they simply do not give any indication of a valuable interaction with users.
  • For this, one needs to have a proper relationship with a user and here I calculate that Yahoo! has somewhere around 140m. (280m if you include Tumblr).
  • These are almost all fixed Internet users but there is the potential for this to move into mobile and Yahoo! is doing everything it can to make the experience better and more engaging.
  • By contrast, Google and Apple are closing on 300m users, all of which are mobile.
  • Yahoo! still has a very long way to go but critically, I think it is doing the right things.
  • Its coverage of Digital Life is excellent and if it can make its assets cohesive and engaging on mobile then it can become a very relevant ecosystem in its own right.
  • Furthermore, a lot of the rally in Yahoo! over the last 12 months can be put down to the fantastic developments being made at Alibaba and expectations of how much value this investment is creating for Yahoo!.
  • Hence, value being attached to the core business remains pretty low when compared to its competitors.
  • This is why Yahoo! remains my dark horse and why it is the stock I would look at with the most interest when considering investing in digital ecosystems. 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.