Who will be Yahoo’s next owner?

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Who will be Yahoo’s next owner?

For the fiscal fourth quarter, Yahoo reported a revenue beat and in-line earnings per share, but it is guiding for fiscal-first-quarter revenue and EPS to be materially below consensus.

The deteriorating environment that Yahoo is seeing is likely prompting the more radical moves such as its openness for sale and the large headcount reduction. Our sum-of-the-parts-model shows that Alibaba Group Holding ( BABA ) is currently about 60% of the stock’s value, Yahoo! Japan is about 12% of the stock’s value, and cash is 14%.

The most logical acquirers of Yahoo!, in our opinion, are Verizon Communications and Microsoft.

Verizon (ticker: VZ ) is logical as it recently acquired AOL, which had been rumored for some time to be a logical target for Yahoo ( YHOO ) itself, while Microsoft ( MSFT ) is logical as it made an offer for Yahoo back in 2008 and may still wish to diversify more into the Web.

Other possible acquirers to contemplate include Alphabet ( GOOGL ) and Facebook (FB ), though we regard them as less likely.

yahoo-doctor
Yahoo! Doctor’s House

This leaves the core business valued at about $6 billion, or 14% of the stock’s value. Therefore, the “reverse spinoff” action that the company is pursuing is more logical than spinning off Alibaba as that latter might incur tax liabilities (particularly as the Internal Revenue Service has refused to bless a Alibaba spinoff as tax-free).

We reiterate our Outperform rating on Yahoo and lower our price target from $45 to $40. The company continues to struggle in its core business, with net display showing only 2% year-over-year growth and net search declining by 18% year-over-year due to a large increase in search traffic-acquisition costs (TAC). However, the company will now explore additional “strategic alternatives,” which we read to mean that it is receptive to receiving offers for sale.

For the fiscal first quarter, Yahoo is guiding for GAAP revenue of $1.05 billion-$1.10 billion (below consensus of $1.15 billion), TAC of $230 million, net revenue of $820 million-$860 million; depreciation and amortization (D&A) of $150 million, adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) of $100 million-$120 million, and non-GAAP operating income of negative $50 million to negative $30 million. We arrive at an estimated non-GAAP EPS of seven cents (below consensus of 13 cents).

For fiscal 2016, Yahoo is guiding for GAAP revenue of $4.4 billion to $4.6 billion, TAC of $1.0 billion, net revenue of $3.4 billion-$3.6 billion; D&A of $550 million, adjusted Ebitda of $700 million-$800 million, and non-GAAP operating income of $150 million-$250 million. It expects to achieve a second-half adjusted Ebitda annualized run rate of about $1 billion, suggesting levels close to $250 million per quarter in the fiscal third and fourth quarters.