$YHOO Q3 Earnings Cheat Sheet

by Enis October 20, 2014 2:05 pm • Commentary

Event:  YHOO reports Q3 earnings tomorrow, Oct 21st after the close.  The options market is implying about a 5.25% one day move, which is in line with the 4 qtr avg move of 5.25%, and the 8 qtr avg of about 5%.

Sentiment:  Wall Street analysts are relatively neutral on YHOO, with 17 buys, 16 holds, and 1 sell, and an average 12 month price target of around $44.  Short interest has picked up to 6.7% of the float in the past couple of months (from around 2.5% for most of the year).  The stock is down 4% year-to-date in 2014, though YHOO is still up around 15% in the past year.

Options Open Interest:  Total open interest is skewed towards calls over puts by a ratio of about 1.9 to 1. Similarly, the one month average volume is also skewed to calls over puts, by a ratio of 2.2 to 1.  The 40 strike has the most open interest among both calls and puts.  The Jan15 40 call line has over 220k of open interest, the most of any line.  Action around that level will be important for options traders.

Price Action / Technicals:  YHOO broke out to its highest level in 10 years in mid-September in anticipation of the Alibaba IPO.  The stock has since sold off back below $40 as many investors who had been using it as a proxy to invest in BABA have moved out of YHOO and into BABA:

YHOO daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
YHOO daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

The key support area on the downside is $32-$33, with last week’s low near $36 an important spot to watch as well.  On the upside, $42 is near the Jan and Oct highs, while the high for the year is $44.  The stock looks rangebound overall.

Volatility:  YHOO implied volatility hit a 2 year high leading up to the Alibaba IPO:

YHOO 30 day implied volatility, courtesy of Bloomberg
YHOO 30 day implied volatility, courtesy of Bloomberg

Options prices have moved a good bit lower since the IPO, to the point where YHOO implied volatility is at its lowest level in 2014 on the day before earnings.  Considering that the technical situation looks rangebound and the BABA IPO is out of the way, options traders don’t expect a big break in either direction at the moment.

Our View:  YHOO was an interesting sum-of-the-parts story in 2012 and 2013, but the stock has stagnated in 2014 as the market priced in most of the value from BABA. In the meantime, the core business has struggled mightily, and investors have lost confidence in Marissa Mayer as a good steward of the firm’s capital.  In that vein, the most important short-term question for investors is what YHOO plans to do with its cash from the BABA IPO.  Clarity on that question will be key for the stock.  As for the core business, continued bad news there won’t be greeted kindly, though YHOO buyers now own the core business (outside of the BABA and Yahoo Japan stakes) for essentially nothing at the current stock price.

In any case, it’s a rangebound situation that looks likely to stay that way given that the sum-of-the-parts is still cheap, but there is no catalyst, the core business has no strong strategy, and management’s prior direction is under increased scrutiny.