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Monday, October 18, 2010

Yahoo (YHOO): Absolutely No Value, NONE... Except that Yahoo News Has 21 Times More Readers Than the Wall Street Journal...Yahoo Sports Double ESPN..

Contrary to the first part of our post's title -- which, like many observers, treats Yahoo as an also-ran Internet franchise -- our recent series on Facebook/Yahoo (YHOO) highlights an enormous sum of the parts (SOTP) discount along with evidence that the company remains highly relevant.

Others are apparently now also seeing the value, given new speculation last week of a merger or acquisition involving private equity players. Yahoo is said to have enlisted Goldman Sachs (GS) to fend off would-be suitors so the company can continue along its new path under CEO Carol Bartz.

When we published our 9/25 post, What's Facebook Worth? Is Yahoo or Facebook a Better Investment?, we mentioned that private equity buyers might be sniffing around Yahoo:
  • Given the head scratching public market discount, common sense would suggest that billions of private equity dollars looking for a home should be extremely interested in Yahoo, a leading franchise that generates fairly steady free cash flow. That said, a sizable control premium would be required to win the business.
Indeed, private equity firms are scooping up value wherever it can be found. As an example, the other week, the Greenbriar Equity Group announced it was acquiring Dynamix (DDMX), a neat little shipping company we mentioned back in June. The deal came at a 58% premium to the prior 30-day average closing price, which -- prior to the deal -- was arguably depressed for the high quality niche company.

Back to Yahoo. We think it's amazing to us how little respect the company receives AND, likewise, how seemingly misunderstood the company is in mainstream media. An article from Sunday's NYTs opens with the following:
  • Even Under New Captain, Yahoo Seems Adrift By VERNE G. KOPYTOFF
  • SAN FRANCISCO — The board of Yahoo, the ailing Web portal, hired Carol A. Bartz as chief executive to apply a little shock therapy. Despite rumblings, Yahoo has a huge audience and is profitable. Now, nearly two years later, the patient is still suffering from many of the same symptoms: a stagnant business, shrinking market share and a shortage of innovation (emphasis added).
The article actually covers a number of key points and is worth reading for those following Yahoo. But, at a broader level -- across the media and on Wall Street -- there seems to be an impression that the company is standing still, has no idea where it's headed, and doesn't innovate. All this despite the fact that tens of millions of people daily use Yahoo Mail, News, Finance, Sports, etc. (ourselves included).

For example, one of Yahoo's "Fun Facts" from the company's press releases page:

Also, per our earlier post, Yahoo! Sports -- with 48.2 million visitors during the month of August according to comScore (SCOR) -- has nearly double the number of visitors versus number two player FOXSports.com (NWS) on MSN (MSFT) and number three player ESPN (DIS).

We could be wrong, but we don't think these functions are ALL going to be usurped by Facebook, Twitter, or any other new network that emerges. These are different mediums. Although more people -- especially teenagers -- are getting their "news" from social networks, we think a significant amount of content will still be delivered by Yahoo, either direct or indirect.

It is true that the deep relationship "social graph" that Facebook and Twitter are accumulating each day can be used for marketing purposes. However, Yahoo also has extensive "clickstream" and relationship data that the company mines daily to aid advertising placement and personalize user experiences. In fact, Yahoo was instrumental in innovating and establishing the underlying open source technology -- Hadoop -- that makes many new computing capabilities possible, not only at Internet companies, but also at "old economy" companies. There's more we could say here, yet suffice to say that we believe innovation is alive and well at Yahoo.

The company reports results Tuesday afternoon. Regardless of what happens with the quarter, we continue to see an incredible discount to a reasonable valuation for the company. If we assume Yahoo's core properties garner a 10% FCF yield versus the 15% recently awarded by the market AND include values for international assets including the Alibaba Group, shares might trade north of $20 per share.

Admittedly, we're not certain how the Internet landscape will unfold over the long-term. Fortunately, we're fairly certain Yahoo's SOTP value is real, providing a comfortable margin of safety.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.

© 2010 Jeffrey Walkenhorst
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