Event: YHOO reports its fiscal Q3 earnings on Tuesday, Oct. 15th after the close. The options market is implying about a 5.25% one day move, which is above both the 4 qtr avg of about 4.75% and the 8 qtr avg of about 3.5%.
Sentiment: Wall Street analysts are actually somewhat negative (for Wall street analysts) on the stock despite its massive run higher in the past year, with 15 Buys, 21 Holds and 2 Sells, with an average 12 month price target of around $32. YHOO’s stock is trading at its highest level since 2007.
Options Open Interest: Open interest is greatly skewed towards calls by a ratio of about 2 to 1, quite a large skew for a $35 billion market cap company. The Oct 29, 30, and 31 calls have more than 35k of open interest, and the Jan14 25, Jan14 30, Jan14 35, and Jan14 40 calls all have more than 60k of open interest (the 30 and 40 strike calls both have over 120k).
Price Action / Technicals: Yahoo’s stock has been on quite a roller coaster ride of over the last 15 years. The stock is essentially unchanged since Dec 1998, though it has had huge up and downs in the interim. The monthly shows the more recent aspect of that roller coaster:
The stock broke above its 2007 high in October. In the short-term the level to watch for downside support is $30, which was the high in July, and also coincides with the rising 50 day moving average:
Volatility: 30 day implied volatility in YHOO has reached a 1 year high, both because of the approaching earnings event as well as the increase in realized volatility in the past few weeks:
Implied volatility in YHOO in prior instances fell into the high-20’s after the report. Higher recent realized vol might mean that it won’t fall quite that far this time.
Our View: Dan posted in depth last year about the value of YHOO from a Sum-of-the-Parts analysis perspective. Since then, the stock has more than doubled, though we got more skeptical about the valuation on the move higher earlier this year. At this point, the enthusiasm for YHOO continues to be in the pieces rather than the core, with the most focus on the Alibaba IPO. Current estimates suggest that YHOO’s remaining 24% stake in Alibaba IPO could be worth about $25 billion, and on a tax adjusted basis could be worth close to half their current market cap. Add in their almost $4.70 a share in cash, their stake in YHOO Japan worth maybe $5.60 a share and some other bits and bobs and you almost get to the high twenty dollar range, or almost exactly where Third Point sold two thirds of their holdings back to the company at $29.11 back in July. Third Point still owns 20 million shares, but is no longer on the board, and the obvious take-away from manager Loeb selling down his stake is that he thinks the stock is very full valued and future upside has more to do with Alibaba then anything that the company was able to do with the core U.S. business.
Meanwhile, the core U.S. business has been a sidenote, though a bit worrying sidenote at that as the company showed a 2%year over year decline in ads sold and a 12% decline in pricing when they reported Q2 earnings back in July. Investors need to get a clear sense for how YHOO intends to make their products stickier, engaging users in an ever increasing social and mobile landscape. Since CEO Marissa Mayer took over in the summer of 2012 the company has been on an acquisition spree with the largest being Tumblr for more than $1 billion. Investors will need to see some sort of roadmap for recent acquisitions and how they plan to compete with the likes of FB, GOOG plus and Twitter. Out sense is that management will be unable to do so in a way that should get investors excited about their core business.
So where do we stand on the stock? while we would be foolish to dismiss the incredible momentum in the shares, we think that the lack of disclosure about Alibaba and the fact that so much of YHOO’s current value is associated with their potential to successfully monetize their investment in a tax effective way makes us nothing short of skeptical of the stock at 8 year highs. If the stock were to sell off back to the 50 day moving avg just below $30 it could be a decent entry for a short term trade into year end.