Yahoo earnings likely to underwhelm investors

The tech giant is due to post disappointing second-quarter figures this month, with concerns that its sizeable stake in Alibaba may not turn out to be its saviour.

'Welcome to Yahoo!' sign
Source: Bloomberg

Investors are preparing themselves for considerably less-than-impressive news ahead of the data release on Tuesday 21 July. Yahoo’s adjusted earnings per share are due to fall from $0.37 in Q2 2014, down to $0.184. Sales are expected to remain fairly unchanged at $1.032 billion, only slightly lower than last year’s $1.04 billion. Last year may have seen a pre-tax profit of $24.848 million, but this will have now collapsed down to a loss of $39.515 million.

The disappointment around these figures however has not dented the institutional perception of the company with 27 firms still having them as a buy, 15 as a hold and only one as a sell. There is a massive premium of 38% between the current price of $38.65 and the average twelve-month target of $53.44.

Investors will be only too aware that the majority of the good moves seen in Yahoo’s shares over the last three years can’t be attributed to the stewardship of CEO Marissa Mayer, but to the company’s major stake in Chinese entrepreneur Jack Ma’s Alibaba. Considering the reputation Ms Mayer built up at rival Google, market watchers must feel somewhat disappointed that her time in charge has not yielded more.

Over the course of that time the Chinese business-to-business company has successfully floated on the New York Stock Exchange, meaning Yahoo’s stake has grown in value to reach as high as $40 billion. On numerous occasions over the last 18 months the market cap for Yahoo has actually dipped below the share price valuation of its holding in Alibaba.

This effectively means that investing in Yahoo has been seen as an indirect way of investing in Alibaba. While that’s definitely worked to Yahoo’s benefit in the past, Alibaba now finds itself having to deal with the regulatory complications that flow from being a US-quoted company and the difficulties of effectively weaving together its numerous acquisitions.

The current thinking is that Yahoo will look to sell off either all or a sizeable percentage of its stake in Alibaba in the fourth-quarter. The big issue then will be what it chooses to do with the resulting funds, and whether a Yahoo without Alibaba will be better placed to utilise these funds than the underlying clients themselves.

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