$YHOO Q2 Earnings Preview

by Dan July 15, 2013 1:32 pm • Commentary

Event:   YHOO reports Q2 earnings tomorrow night after the close.  The options market is implying about a 4% move into the print.  The 4 qtr average move has only been about 2.5%, while the average over the last 8 quarters has been about 3%.

Sentiment:   Despite YHOO’s 80 plus % gains since Marissa Mayer took over as CEO last summer, Wall Street analysts remain fairly mixed on the stock with 16 Buys, 20 Holds and 2 Sells, with an average 12 month price target at ~$28.  Short interest sits at a little less than 3% of the float.

Price Action:  YHOO is up 36% this year, dramatically out-performing the Nasdaq up 19%, AMZN up 20%, GOOG up 30% and EBAY up only 10%.  After making new 6 year highs in Mid May, the stock saw a peak to trough sell off of about 14% to its recent lows in late June, which was nearly double the weakness from the SPX from the May highs to the June lows.  

Technicals:   This is about as good as it gets on a one year basis.  The stock was stuck in the mud last summer prior to management change, but after a breakout above $16.50, the stock systematically climbed a step ladder, rallying then consolidating, rallying then consolidating, making a series of higher highs and higher lows.

[caption id="attachment_28105" align="aligncenter" width="589"]YHOO 1 Year chart from Bloomberg YHOO 1 Year chart from Bloomberg[/caption]

In the near term, $24 should serve as very good support, while the $22 level, right above the 200 day moving average will be the sort of “Custer’s Last Stand” for the bulls.

Fundamentals:  Despite the eye-popping ytd stock performance, and the eye-catching M&A announcements, YHOO’s core U.S. based advertising business continues to struggle.  When the company reported Q1 earnings back in mid April, they reported a slight revenue miss and guided down Q2 below consensus, likely the result of their challenges monetizing mobile platforms and the loss of their early lead in display advertising to GOOG with added pressure from FB.  Not to put too fine a point on it, but display advertising was down 11% year over year in Q1.

Bulls on YHOO are generally  looking at the sum of the parts valuation of YHOO.  Back in early May, Bernstein Research analyst Carlos Kirjner, who rates the stock a Hold with a $30 price target gets to his fair value in the following way:

-35% stake in YHOO Japan worth $5.66 share

-Remaining ownership in Alibaba $13.17

-Value of Preferred shares $.74

-Value of Cash on balance sheet $4.85

-Core Business at 4x Bernstein 2014 Ebitda est $5.83

So you get the point, back when YHOO was a teenager, the core was still valued at a small part of their market cap.  Fast forward to today, and the sum-of-the-parts argument is getting less and less attractive.

Vol SnapShot:  IV has spiked into the event, reflecting some of the recent actual volatility in the stock but is still slightly lower than the previous 2 earnings events which coincidentally (or not) saw sell-offs on the news. August vol is 33 and should see the low 20’s following the event so likely a ~30% contraction.

[caption id="attachment_28107" align="aligncenter" width="527"]Screen Shot 2013-07-15 at 10.12.27 AM from LiveVol Pro[/caption]


Options Open Interest:  Total call open interest nearly doubles that of puts at about 890k to 448k.  The single largest lines are:

-154k of the Jan14 30 calls

-93k of the Jan14 20 calls

-76k of the Jan14 25 calls

-59k of the Jan14 15 puts

-55k of the Jan14 17 puts

-31k of the Oct 29 calls

My View:    There appears to be no shortage of potential positive catalysts for YHOO shares, from the prospect of Marisa Mayer turning around YHOO’s core business, to the value of their Asian assets being monetized for more than analysts expect.  It doesn’t change the fact that her 5 CEO predecessors have failed at the very same task that is before here.  Make no mistake about it, there is a lot of good news in the stock, but the jury is still out on whether or not she is in the early stages of what would amount to one of the most dramatic turnarounds for a tech company in the post dot-com bubble era.

This was a stock that we got right when it was in the mid teens last fall (here) and then wanted to buy on pullbacks after the big run to the low 20s early this year (here) and then a tad to early tried to fade the move when it appeared that CEO Mayer was gonna try to spend her way out of the core business’ malaise (here)….a tad too early.  But here is the thing, this company has a lot of unknowns and one very motivated leader.  YHOO, despite the sum of the parts valuation getting stretched in the high 20s, likely remains a stock that will be and should be bought on dips as the core business’s troubles are fairly well known at this point. As we get closer to Mayer’s second anniversary on the job, and the Alibaba stake is absorbed, investors will likely once again focus on YHOO U.S.  In the meantime, it appears that the buy the dip crowd will rule the day.