Turnarounds That Haven't Turned Around: Yahoo! (YHOO, GOOG, NWS, MSFT, EBAY)

If there has been a disappointing return of a tech and web giant it has been that of Yahoo! (NASDAQ:YHOO).  We aren’t calling for any new fresh management axes or anything like that, not yet anyhow.  Last year we were one of the first to call for Terry Semel to get out of dodge.  Jerry Yang hasn’t proven himself to be again-worthy yet and that verdict is still quite a ways off.

The real problem that Yahoo! is truly facing is that Google (NASDAQ:GOOG) has eaten its lunch.  Search is still growing, but it seems that through time that Google is still winning.  Microsoft (NASDAQ:MSFT) is also hellbent on becoming a beast in online advertising.  For a company in perpetual change that is becoming a harder challenge.  We aren’t even discussing the YouTube and social networking comparisons to MySpace, LinkedIn, and Facebook. Same goes for mobile spectrum and wireless initiatives.

So far Wall Street is still confused about Panama.  It is still not known and hasn’t been a proven Google killer and Panama could end up as dated as Van Halen’s Panama.  Yahoo! has been making progress on its challenge to AdSense, although after speaking with some small business merchants whose business merchant accounts were shut off right after Thanksgiving there are many unhappy people here.  So the verdict is still out there.

We expect more DSL access pact changes, we’d expect more changes to the beloved Yahoo! Finance, and much more.  The recent Alibaba stake has also yet to materialize into anything more than a bullish head-fake, and Yahoo! Japan is still another potential source for the company to unlock value.

Unfortunately, Yahoo! has not made an aggressive layoff plan that Wall Street expects.  Part of the reason may be that Internet companies are still supposed to be growth companies and a round of large layoffs doesn’t exactly ring "the greatest growth stock" to investors’ ears.  It is also likely that both Google and Microsoft would be there to gobble up fired Yahooligans and Yahoo! probably wouldn’t have much of a leg to stand on in non-compete cases to protect its internal business if it fires them (even with a severance package).

There are likely going to be some spending cuts in certain aspects of the business, although right now this might be too widespread to bother picking and choosing what percentages may get allocated to its multiple business lines.  Yahoo!’s biggest trick it may engineer is by cutting costs and allowing the attrition to lower headcount without formally announcing cuts.  With a combined strengthening Google and a Microsoft comeback, we are not yet certain that in a softer 2008 economy that Wall Street is extremely comfortable with 2008 targets.  Those newspaper companies are also getting pretty desperate and it is hard to imagine that 2008 is all of a sudden going to be a resurgence year for print (or 2009 or 2020).  If the company doesn’t somehow get its forward earnings up then the company will not even be at a trading discount on its EPS multiple.

But there is a potential light at the end of the tunnel that may keep Yahoo! shares from being hit endlessly.  If Yahoo! falters in 2008 it is very possible that a buyer may step up to the plate.  News Corp. (NYSE:NWS) has been fingered by many as a would-be buyer.  Viacom’s ad-pact just signed with Microsoft may have removed it from being able to thought of as an LBO-buyer, although many have the belief that Microsoft might try a deal or even that a merger with eBay (NASDAQ:EBAY) could be at least possible.  Would Bezos try a truth or dare deal?  The truth is that as of all known data, any deal is mere conjecture and pondering at this time.  NBC may also not be a candidate since many think that will soon become its own entity, despite what the parent G.E. states.  There is of course the angle that one of the Middle Eastern sovereign funds may offer to take a significant stake.

Despite all of its problems, Yahoo! does still have a lot going for it, and if you go back to mid-2002 shares are still are still up 200% and no one seems to discuss that anymore.  Jerry Yang may be doing a much better job than Wall Street knows and it’s always possible that the company may finally post a significant upside to earnings one quarter.  And maybe not. The recent stock performance believes not.  That is the Internet for you. It just can’t be forgotten that the knife cuts both ways.  Yahoo!’s endgame has not been decided yet.  And its turnaround has not yet manifested.

With a $23+ handle, it is at the bottom of its $22.27 to $34.08 trading range.  At the end of 2005 and start of 2006, Yahoo! shares traded north of $40.00.

Jon C. Ogg
December 19, 2007

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Jon Ogg can be reached at [email protected]; he produces the SPECIAL SITUATION newsletter and he does not own securities in the companies he covers.