$YHOO : What is hot about $YHOO

Beside a hot CEO, what is exciting about this stock

Potentially heading to 17-11 or even $5?

Disclosure : Initiated shorts after earnings. Adding on confirmation. Stops above the $21.5 highs.

YHOO has had a good run up for nearly 6 months after breaching $16 barrier. May be it is to do with the new CEO and also the related spring clean of the company. And in the 6 months she seems to have put a fire under the stock presiding over two quarters of earnings which seems to have been appreciated by the street and investors alike. But is this relic of bygone internet boom still worth all these attention?

Yahoo has been a laggard for quite some time and I am sure they still must be cursing the day they refused $40 bln offer from MSFT. But well that time is gone today it is worth barely $24 bln and I even ask why that much. Looking at the latest earnings and year on year performance few things stand out:

  • Top line is barely growing for last 2 years.
  • Bottom line is good at 20% margin and helped here and there by some disposals.
Now what can they do to command such valuation. Making lofty assumptions such as for next 5 years they will grow revenue at 5%, retain margins at 20% and even after that be valued at a PE of 20 and meanwhile keep buying shares, I get current price target of 17. If I assume that revenue would not grow at all, I get a price target of 13. Of course my model is crazy, it undervalues all stocks so I can say it works only in bear market (lol) but it seems market is putting a high premium on the future of YHOO. May be the underlying assumption is that once again a suitor (greater fool?) will come along and make an offer for the company. Otherwise the company is slowly bleeding and with temporary sparks in dying fire in winter nights, there is not much left in it. The reaction after earnings seem to confirm this and if the move down is followed up, it would not be long before 17 or 13 or even lower could be seen on this stock. The highs reached before earnings and immediately after earnings give a good reference point for stops limiting the risk to the trade.

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