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Yahoo! crushes earnings estimates; what's next for YHOO stock?

Yahoo! Inc. (YHOO) has reported its fiscal Q3 earnings report after the market closed, and it has positively surprised EPS estimates by $0.21, and it has also beat estimates on revenue. The stock price was up today by $0.90/share, and in after-hours trading, the stock put up a strong performance, to a high of $41.76/share, or roughly 3.5%.

The beat can largely be attributed to Yahoo’s stake in Chinese e-commerce goliath, Alibaba (BABA), which debuted earlier last month, and was the largest ever IPO in history, an estimated $25 billion record. YHOO cashed in on about $6.3 billion from selling part of its stake, but Mayer will have to do more to complete a successful turnover for the ailing internet company and search engine.

Mayer will no longer be able to hide behind BABA and use this company as a reason to buy shares of YHOO. After all, Yahoo’s stock price has steadily declined after BABA went public, and for good reason. YHOO’s stock was mostly hyped up by investors as a back-door stock to the highly anticipated BABA IPO.

However why should anyone hold on to a company struggling with its core business, and more so, why should investors who bought into YHOO as a source of investing into BABA keep positions in it when the real deal, BABA, is already publicly traded?
 
YHOO’s core business is struggling, and the company has been urged by many activist investors to push for a merger of some sorts with America Online (AOL), however talks fell apart, and Mayer does not seem very keen on spending the money from BABA on acquisitions.

Others have pushed Mayer to increase her company’s stake in Yahoo! Japan, which may be a good idea, but it was also apparently turned down. Others from Starboard Value, mainly Jeffrey Smith, have pushed Mayer with a strategy to unlock value for YHOO’s shareholders, but that has not come to fruition either as of yet.

YHOO may have done well in its choice to invest $20 million in Snapchat, which currently has a whopping valuation of about $10 billion, but how would this serve to increase YHOO’s core value, and appease investors who are looking for real growth? Potentially, Snapchat could be big if it becomes more of an advertising platform, rather than a swift photo chatting application, and YHOO would definitely appreciate that, though their investment is very small in the upstart company.

Bottom Line

Yahoo is arguably sitting on a lot of cash, and YHOO’s sales grew to $1.15 billion, or 1% increase. Mobile revenue for YHOO also grew, and surpassed $200 million for the quarter, and it is expected that it will top $1.2 billion for the full year.

YHOO also boasted a net income of $6.78 billion, or $6.70/share, which was still immense following an after-tax profit of $6.3 billion from its stake in BABA. YHOO’s choice to invest aggressively in BABA has paid off, but Mayer will need to push for strong growth in the core business in order to push YHOO shares back to new highs.

YAHOO! INC (YHOO): Free Stock Analysis Report
ALIBABA GROUP (BABA): Free Stock Analysis Report
AOL INC (AOL): Free Stock Analysis Report
 
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Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.

Zacks Investment Research

Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.