Event: Yahoo (YHOO) reports Q3 results tonight after the close. The options market is implying about a 5.5% one day move, which is rich to the 4 qtr average move of only 2.5%, and a tad greater than the 10 year average of about 5%.
Price Action / Technicals: YHOO is down 34% on the year, but up 22% from its recent lows which were also two year lows.
The five year chart below tells you all you need to know. There were 3 phases, first what appeared to be a never ending rotation of management and listless execution from 2010 to late 2012 when current CEO Marisa Mayer took over. Then the 2013 ramp on their Alibaba stake, some activist involvement, culminating in the blow-off top on BABA’s ipo. And then the post BABA hangover:[caption id="attachment_57805" align="aligncenter" width="600"] YHOO 5 year chart from Bloomberg[/caption]
A full round-trip would be back to $20. But that could only happen if their Asian assets crashed in value (we will get to the sum of the parts later). But the fact that the stock broke its August 24th low in September following the IRS’s unfavorable ruling on YHOO’s intent for a Tax Free Spin of BABA, means that the mid $20s could be in the cards if the company has any further setbacks on that front. And $35 appears to be massive technical resistance:[caption id="attachment_57806" align="aligncenter" width="600"] YHOO 2yr chart from Bloomberg[/caption]
Implied Volatility Snapshot: Short dated options prices remain well bid into the Q3 print, due largely to expectations of an update on the BABA spin. I suspect 30 day at the money implied vol should stay bid after the results as investors will have to account for the potential movement in BABA on its results on Oct 27th. The options market is implying about an 8% one day move in BABA. With the proxy at play, short dated vols in YHOO should only settle in the low 30’s after their print:[caption id="attachment_57807" align="aligncenter" width="600"] YHOO 1yr chart of 30 day at the money Implied Volatility from Bloomberg[/caption]
Sum of the Parts: Plain and simple, YHOO and its core business are not driving the train. What is is the value associated with their remaining 15% stake in Alibaba (BABA), their ability to do a tax free spin-off of the asset, the value of their 35% stake in Yahoo Japan, and their ability to monetize that at some point in the near future. And lastly what the company plans to do with the cash. In the mean time, investors have assigned little value to the company’s core advertising business. RBC internet analyst Mark Mahaney recently published his sum of the parts valuation for YHOO assigning a $47 value, well above current levels (with a lot of bullish assumptions):[caption id="attachment_57808" align="aligncenter" width="600"] From RBC Capital Markets[/caption]
Our Take: Like most others, we have little faith that Marissa Mayer will be able to meaningful compete with the likes of Facebook (FB) and Google (GOOGL) given Yahoo’s current assets and what seems to be the never-ending exodus of high level employees. So the big concern is what will they do with the cash? Share-buybacks are great and they have been doing a lot of it, but the company will likely once again be the target of activists if they don’t act fast. I suspect they make a large, and questionable trans-formative acquisition (if they are successful with their tax free spin off of BABA as planned in the fourth quarter.) Investors are unlikely to look kindly on such an event. I also have to think Marissa Mayer is sick and tired of being the punching bag for the financial & tech press and investors. It’s my guess that YHOO will be dramatically different next year than it is today.
So the $30 billion question is YHOO’s core business a free option? And if so how to play?
Potential Trades: YHOO ($33.20)
Bullish: Buy the Oct23rd weekly/ Dec 35 call calendar for 1.05
Bearish: Buy the Oct23rd weekly Dec 31 put calendar for 1.00
Rationale – The main event for the stock over the next few months is BABA’s earnings and the tax decisions. These trades fade the move on YHOO’s earnings in order to own the move after.
We prefer to take a closer look after results and set up in front of BABA’s results next week which could be the big driver.