Yahoo (YHOO) Still Has Valuable Internet Assets
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I look upon Yahoo as a collection of Internet assets. In valuing the company, I have valued their Asian equity investments separately from their wholly owned properties. I actually think Yahoo would be best valued as a combination of five different properties: Yahoo Japan, the Alibaba Group, Global Search, Global Display, and Global Mobile. Separating the company into two chunks is the best I can do with publicly available information.
Valuing Yahoo’s Asian Equity Investments
Yahoo has equity positions in two large Asian properties — a 33% position in Yahoo! Japan and a 39% position in the China-focused Alibaba Group.
Yahoo! Japan is traded on the Tokyo stock exchange, and Reuters shows it as having a market capitalizatin of 2,547,054M yen. The current Yen-Dollar exchange rate is 107.91:1, which translates into a $23.6 billion market capitalization for Yahoo! Japan. Yahoo owns 33% of that, about $7.8 billion or $5.58 per Yahoo share.
The Alibaba Group is not publicly traded, but their ecommerce subsidiary Alibaba.com went public back in November of 2007. Reuters shows a market capitalization of HK$66,893.20M for Alibaba.com. The currency translation rate between the Hong Kong Dollar and the US Dollar is currently 7.81:1, which means that Alibaba.com has a market capitalization of $8.56 billion. Yahoo’s 39% position in the Alibaba Group gives them a 28% indirect position in Alibaba.com. Yahoo therefore currently owns a $2.4 billion piece of Alibaba.com, worth $1.72 per share.
The Alibaba Group also owns three other very successful Chinese internet properties — the online auction website Taobao.com, the online payments company Alipay, and the web services provider Alisoft. These three subsidiary companies are not publicly traded, so we cannot directly calculate their worth to Yahoo.
One estimate, however, has the Alibaba Group worth 2.5 times as much as the publicly traded Alibaba.com subsidiary. That seems about right to me, so I would value the remaining private companies in the Alibaba Group as 1.5 times the publicly held Alibaba.com position. This yields another $2.58 per share to Yahoo.
So, Yahoo’s equity holdings in Yahoo Japan and the Alibaba Group are worth approximately $9.88 per share of Yahoo right now ($5.58 + $1.72 + $2.58).
Valuing the Rest of Yahoo
We have two projections for Yahoo’s future available to us. On the one hand, Yahoo’s management is projecting a doubling of Yahoo’s cash flow by 2010. On the other hand, the rest of the world is looking for 8-10% revenue growth at best, with a death spiral not unlikely. I think the truth will end up somewhere inbetween. I think Yahoo’s asset value will remain stable and growing, just not at the pace management is projecting.
Most importantly, I do not believe that Yahoo’s asset value, as illustrated below, is deteriorating. The stock price has been deteriorating, and Yahoo’s percentage share of the search market has been deteriorating. Yet the overall internet pie has grown so rapidly that Yahoo’s asset value has remained stable. I think this will continue, and although Google should continue to get the lion’s share of global internet growth, I expect Yahoo’s revenues to grow in the 8-10% range annually over the next five years.
I also think the recent deal between Google and Yahoo is a tempest in a teapot. The deal will add a few hundred million to Yahoo’s bottom line (maybe $0.05 per quarter), but I do not think it will result in damage to Yahoo’s franchise or asset value. If you look at the search impressions delivered by AOL and the Ask Network over the last year, they’re flat - as is the number of search impressions from Microsoft and Yahoo. Only Google’s number of search impressions has risen.
Google provides revenue generation services for Ask, and Google provides both the search engine functionalities and revenue generation for AOL. Google (over the last year) provided neither search engine facilities nor revenue for either Microsoft or Yahoo. So, Google’s level of interaction does not appear to have affected their partners’ number of search impressions — everybody but Google has been flat. I therefore do not expect the deal with Google to erode Yahoo’s asset value.
Middle of the Road Projections for Yahoo
Here is my non-GAAP income statement for Yahoo excluding their equity investments, given my middle of the road outlook for the company’s prospects. I am projecting a stable asset base generating 8-10% revenue growth. I am expecting the operating margins to stabilize and move slightly higher in 2010, and I am expecting management to slowly shrink shares outstanding.
The revenue and earnings numbers shown below for the near term (2008 and 2009) are very close to current consensus analyst estimates. They are well below Yahoo’s management projections. The projections I show below for 2013 are close to what Yahoo management is projecting for 2010. Effectively, I am saying that Yahoo’s management will eventually deliver on their projections — it will just take six years rather than three. I am also saying that the current frenzy regarding Yahoo’s demise is over blown. I believe that the company will continue to grow.
| Yahoo’s Projected Non-GAAP Income Statement - 2006 to 2013 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |
| Revenues | 4,559,755 | 5,112,573 | 5,720,000 | 6,420,000 | 7,120,000 | 7,820,000 | 8,520,000 | 9,220,000 |
| Y-Y Growth | 12.1% | 11.9% | 12.2% | 10.9% | 9.8% | 9.0% | 8.2% | |
| Cost of revenues | 803,178 | 971,429 | 1,315,600 | 1,412,400 | 1,495,200 | 1,642,200 | 1,789,200 | 1,936,200 |
| % Cost of revenues | 17.6% | 19.0% | 23.0% | 22.0% | 21.0% | 21.0% | 21.0% | 21.0% |
| Operating expenses | 2,390,681 | 2,873,304 | 3,317,600 | 3,595,200 | 3,916,000 | 4,301,000 | 4,686,000 | 5,071,000 |
| % Operating expenses | 52.4% | 56.2% | 58.0% | 56.0% | 55.0% | 55.0% | 55.0% | 55.0% |
| Operating income | 1,365,896 | 1,267,840 | 1,086,800 | 1,412,400 | 1,708,800 | 1,876,800 | 2,044,800 | 2,212,800 |
| % Operating income | 30.0% | 24.8% | 19.0% | 22.0% | 24.0% | 24.0% | 24.0% | 24.0% |
| Other income, net | 157,034 | 154,011 | 95,000 | 95,000 | 95,000 | 95,000 | 95,000 | 95,000 |
| Income before taxes | 1,522,930 | 1,421,851 | 1,181,800 | 1,507,400 | 1,803,800 | 1,971,800 | 2,139,800 | 2,307,800 |
| Provision for income taxes | 635,263 | 564,545 | 472,720 | 602,960 | 721,520 | 788,720 | 855,920 | 923,120 |
| Income tax rate | 41.7% | 39.7% | 40.0% | 40.0% | 40.0% | 40.0% | 40.0% | 40.0% |
| Net income | 887,667 | 857,306 | 709,080 | 904,440 | 1,082,280 | 1,183,080 | 1,283,880 | 1,384,680 |
| Net income margin | 19.5% | 16.8% | 12.4% | 14.1% | 15.2% | 15.1% | 15.1% | 15.0% |
| Earnings per share | 0.61 | 0.61 | 0.51 | 0.65 | 0.79 | 0.87 | 0.95 | 1.03 |
| Y-Y Growth | 0.2% | -16.7% | 28.5% | 20.5% | 10.1% | 9.3% | 8.6% | |
| Shares outstanding | 1,457,686 | 1,405,486 | 1,395,416 | 1,385,418 | 1,375,492 | 1,365,637 | 1,355,852 | 1,346,138 |
| Y-Y Growth | -4% | -1% | -1% | -1% | -1% | -1% | -1% | |
Valuing Yahoo at $23 Now, $40 Long Term
So, my long term value for Yahoo excluding their equity positions in Yahoo! Japan and the Alibaba Group is $30. This $30 value is calculated by averaging a 25 multiple on 2013 estimated EPS of $1.03 and a 5 multiple on 2013 estimated sales.
Discounting that $30 back at a steep 15% annualized rate, I would pay $13.80 for the non-Asian portion of Yahoo right now. I believe the positions in Yahoo! Japan and the Alibaba Group are worth $9.88, as shown above, so I would pay a combined $23.68 for Yahoo right now. The stock is trading for $23 at the moment, so I would buy Yahoo at the current price.
You can click the spreadsheet below for more details and alternative risk rates.
View the spreadsheet used for this valuation analysis.
Search Engine Popularity - Yahoo Has Stable Audience, Declining Market Share
This chart shows monthly US core search queries for the five largest search providers, as measured by Comscore. Yahoo, Microsoft, AOL and Ask have had flat search traffic over the last ten months, while Google has grown.
Here is the table of data behind the chart. Note that Google’s share of the search impression market has risen from 55.2% to 61.6% over the last 10 months, while Yahoo’s market share has declined from 23.5% to 20.4%.
| Monthly US Search Impressions (mm) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Jul-07 | Aug-07 | Sep-07 | Oct-07 | Nov-07 | Dec-07 | Jan-08 | Feb-08 | Mar-08 | Apr-08 | |
| Google Sites | 5,459 | 5,545 | 5,356 | 6,151 | 5,882 | 5,629 | 6,139 | 5,855 | 6,438 | 6,514 |
| Yahoo! Sites | 2,325 | 2,290 | 2,227 | 2,405 | 2,249 | 2,211 | 2,332 | 2,136 | 2,296 | 2,159 |
| Microsoft Sites | 1,214 | 1,106 | 969 | 1,036 | 984 | 940 | 1,030 | 953 | 1,012 | 961 |
| AOL LLC | 436 | 441 | 405 | 443 | 453 | 442 | 514 | 488 | 521 | 491 |
| Ask Network | 462 | 438 | 444 | 491 | 463 | 415 | 475 | 450 | 503 | 458 |
| Total Search | 9,896 | 9,820 | 9,401 | 10,526 | 10,031 | 9,637 | 10,490 | 9,882 | 10,770 | 10,583 |
| % of US Search Impressions | ||||||||||
| Jul-07 | Aug-07 | Sep-07 | Oct-07 | Nov-07 | Dec-07 | Jan-08 | Feb-08 | Mar-08 | Apr-08 | |
| Google Sites | 55.2 | 56.5 | 57.0 | 58.4 | 58.6 | 58.4 | 58.5 | 59.2 | 59.8 | 61.6 |
| Yahoo! Sites | 23.5 | 23.3 | 23.7 | 22.8 | 22.4 | 22.9 | 22.2 | 21.6 | 21.3 | 20.4 |
| Microsoft Sites | 12.3 | 11.3 | 10.3 | 9.8 | 9.8 | 9.8 | 9.8 | 9.6 | 9.4 | 9.1 |
| AOL LLC | 4.4 | 4.5 | 4.3 | 4.2 | 4.5 | 4.6 | 4.9 | 4.9 | 4.8 | 4.6 |
| Ask Network | 4.7 | 4.5 | 4.7 | 4.7 | 4.6 | 4.3 | 4.5 | 4.6 | 4.7 | 4.3 |
| Total Search | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 |
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