YHOO reports Q1 results today after the close. The options market is implying a one day move of about 5.5%, which is a tad rich to its 4 qtr avg of about 4.8%.
While today’s report will focus on YHOO’s core business, It’s well known that YHOO’s value at the moment is all about the company’s value of its assets, primarily it 384 million shares of Alibaba (BABA), Yahoo Japan and their $10 billion in cash, account for more than the stock’s current $42 billion market cap before taxes.
Back in mid February after the company announced their plans to spin-out their sizable BABA holdings in a tax free manner, Reuters Breaking-views had a great discussion on the sum of the parts and what exactly YHOO’s current market cap is discounting, from their core business to the the new “Spin-Co” (read here). The obvious take-away is that aside from the discount placed on the asset value, investors are viewing YHOO’s core as worthless despite the more than $1 billion ebitda expected this year on $4.3 billion in sales.
BABA’s 21% decline year to date has clearly weighed in on YHOO, and there is no telling when the stock will stop declining, and this will continue to move YHOO shares as every $1 move in BABA should move YHOO about 40 cents. The Tax Free spin to investors is not expected to close until Q4.
It is my sense that if YHOO were free to trade on its core, with a massive cash hoard and a very motivated CEO to prove her worth (despite the stock being up more than 200% since she joined in mid 2012, she has been given little credit), I suspect the stock despite the company’s weak performance in display advertising would once again become a Wall Street darling. Why?? Because Wall Stree loves an underdog, and the current valuation implies that YHOO is road kill.
Last week CEO Mayer renegotiated their long standing search deal (here), and by most accounts tweaked it in YHOO’s favor, this could be a stepping stone to some bolder initiatives in re-invigorating their core. Regualr readers know that one of the only ways I think YHOO can compete with the big boys in search / advertising is to make a trans-formative deal. An activist had suggested a tie up with AOL, that is not the sort of deal. And wasting money on pseudo social properties like Tumbr aint gonna cut it either. A merger with Twitter would make a ton of sense for a whole host of reasons, but we can save that for another conversation.
Following tonight’s results, I would be inclined to be a buyer on weakness, probably at $40 as it is my belief that if BABA were to find support at $80, and YHOO showed the slightest bit of progress in their core in the coming months prior to the BABA spin, YHOO would be back above $50 prior to the Spin.
Here are two trades I would consider prior to the event, if I were inclined to be long:
Long Stock Alternative:
YHOO ($44.80) Buy Jan16 40 / 50 Risk Reversal for .25
-Sell Jan16 40 put at 2.15
-Buy Jan16 50 call for 2.40
Break-Even on Jan16 Expiration:
-Profits: above 50.25
-Losses: up to .25 between 50.25 and 40 lose up to .25, below 40 put the stock.
Rationale: rather than buy the stock at $45, I would define a range where I would be put the stock on Jan expiration down a little more than 10% and up a bit more than 10%, with market to market risk between.
or This is the one I am strongly considering now:
YHOO ($44.80) Buy the May/July 48 call calendar for .70
– Sell 1 May 48 call at .50
– Buy 1 July 48 call for 1.20
Rationale – This calendar sells a call in May just outside the expected earnings move and positions for 2 more months of potential upside. If the stock is near $48 on May expiration this trades works best. With the ability to further spread the July calls by either rolling the calendar to June or turning the July calls into a vertical call spread.