Event: YHOO reports its Q4 earnings today after the close. The options market is implying about a 5.25% one day move, which is above both the 4 qtr average of about 3.75%, and the 8 quarter average of about 3.25%.
Sentiment: Wall Street analysts have been relatively mixed on YHOO, despite its 80% return over the last year. They have 19 buys, 18 holds and 1 sell on the stock, with an average 12 month price target of $40.56. Short interest sits at about 3.25% of the float. However, open interest in YHOO options reflects the large dose of optimism in the stock that has built ever since Marissa Mayer became CEO in mid-2012.
Options Open Interest: YHOO options volumes have been dominated by calls for much of the past year. The total open interest in YHOO shows a call to put ratio of 2 to 1, quite a large skew for a $37 billion market cap company. One month average volumes have also favored calls, by a ratio of about 2.5 to 1. The following strikes have over 20k of open interest:
-Feb22nd 41 calls
-Mar 40 calls
-Apr 33 puts
-Apr 37 calls
-Apr 40 calls
-Apr 42 calls
-Apr 44 calls
-Apr 45 calls
-Jul 42 calls
-Jan15 30 calls
-Jan15 35 calls
Price Action / Technicals: YHOO has broken convincingly below its 50 day moving average this month for the first time since June. In fact the steadiness of YHOO’s uptrend since its August 2012 is quite incredible, following its rising 50 day moving average almost in a straight line:[caption id="attachment_35458" align="alignnone" width="600"] YHOO daily, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
The stock has not touched its 200 day moving average since then, and is still almost 20% above its rising 200 day ma, currently around $31.
On the upside, YHOO encountered resistance above $40 in the past month (its 10 year high is $43.66, from January 2006):[caption id="attachment_35459" align="alignnone" width="600"] YHOO weekly chart, Courtesy of Bloomberg[/caption]
The stock’s high in 2014 was $41.72, and the 50 day moving average is around $38.85, which is the first area of resistance. $35 is near-term support before the 200 day moving average around $31.
Fundamentals/Valuation: YHOO has been a favorite among tech investors ever since Marissa Mayer took over. Funnily enough, the stock’s appreciation hasn’t actually been much related to any operational improvements, but rather the rising valuation of the Asian parts – specifically, Alibaba and Yahoo Japan. The U.S. business has actually continued to struggle quite a bit, as Dan detailed in his rundown after last quarter’s earnings report.
In any case, here is what GS research had to say ahead of the quarter:
We expect Yahoo’s 4Q revenues and adjusted EBITDA to be marginally above consensus as strength in search and early native ad monetization offset ongoing declines in desktop monetization, when the company reports after the close Tuesday, January 28. Traffic mix continues to shift to mobile, while programmatic buying continues to pressure premium desktop inventory. Having said that, investor attention remains squarely focused on the continued appreciation of the Asian assets, the recently announced $5bn buyback, and management’s longer term capital allocation plans, making the risk/reward in owning Yahoo, in our opinion, favorable.
YHOO is still viewed as a sum-of-the-parts story, but a much more expensive one than 18 months ago.
Volatility: Implied volatility in YHOO is near the 40 level, at the high end of where it has been prior to earnings over the last 2 years (though lower than its October report):[caption id="attachment_35460" align="alignnone" width="600"] 30 day implied vol in YHOO, Courtesy of LiveVolPro[/caption]
YHOO stock has had low realized volatility for the past 6 months, but interest in the stock is likely to build ahead of the expected Alibaba IPO later this year. Options might get bid up once the event date is announced. After earnings, we expect implied vol to move back towards the 30 level.
Our View: Marissa Mayer has done a fairly good job putting “lipstick on a pig” during her tenure as CEO. While investors have anointed her the comeback kid, only time will tell with some of their recent moves on the content front and their ability to push into social with acquisitions like Tumblr and their progress on mobile. In the near term, aside from broad market palpitations, Alibaba is driving the train, and until they file an S-1 to go public in the U.S. or in Hong Kong, investors will be left with the limited disclosures on YHOO’s conference calls about the Alibaba’s net income contribution to YHOO. I would also suggest that Alibaba has seen a fairly significant ramp from a valuation perspective in the last year, with some analysts seeing a public market valuation as high as $200 billion. I think it is fair to suggest that the value is not a “take it to the bank” number. With recent data hinting to a slowdown in economic activity in China, this could be a moving target of sorts.
We could see selling down to the mid to low $30s on any weakness in YHOO’s core, less than stellar Alibaba results, and a generally weak market. In the low $30s though, the stock would be attractive for what could be a series of Q2/Q3 catalysts, namely easier comps for YHOO core, Alibaba IPO and a better ad environment with the soccer World Cup and 2014 mid term elections.