Why the Yahoo! Rally is Over (YHOO, GOOG)

Shares of Yahoo! Inc. (NASDAQ: YHOO) got a nice boost yesterday on the news that the company’s CEO had been fired. But all good things must end, and that’s what is happening yesterday as the shares are once again losing ground. Midday, they ticked up again as activist shareholder Daniel Loeb  said he had 5.15% of Yahoo!’s shares. He asked several of the firm’s directors to step down.

The very modest improvement in Yahoo!’s shares shouldn’t be any big surprise now that investors have had a chance to think about the company’s prospects, with or without Carol Bartz. Here’s our take.

First, who would want to replace Bartz? Yahoo’s stock is falling like a rock and turnaround options are not apparent. A new CEO would likely be presiding over the final dissolution of the company. That’s not exactly a resume builder.

Second, Yahoo’s portal business is valued at no more than about $3 billion, just under 5 times net earnings. The company’s value lies in its 43% stake in China’s Alibaba e-commerce company and its 35% stake in Yahoo! Japan. That leads to the next problem.

Third, Alibaba is the only buyer for Yahoo’s stake in the Chinese company. It offered Yahoo $10 billion for the shares last year, an offer which Yahoo turned down. Because Alibaba retains a right to match any offer for the 43% stake, Yahoo is effectively captive to the Chinese company.

Fourth, the Yahoo! Japan venture with Softbank is subject to the same constraint on a possible buyer as is the Alibaba stake. No glory here either.

Finally, Yahoo’s display advertising revenue grew by 2% year-over-year in the second quarter, while its search ad revenue lost -45%. Both Google Inc. (NASDAQ: GOOG) and Facebook are hammering on Yahoo’s display ad revenue, and Google has virtually sucked all the search ad dollars out of Yahoo.

There really doesn’t appear to be any escape for Yahoo. The company doesn’t even control its own destiny, having ceded that to Alibaba and Softbank. The end of this story is pretty well set — now we’re just going to get the grisly details.

Paul Ausick