Some of the media and many financial analysts have said the Yahoo! Inc.’s (NASDAQ: YHOO) core business has no value at all, or may have a negative value effect on the public corporation’s market capitalization, once its holdings in Alibaba and its partial ownership of Yahoo! Japan are subtracted. However, a look at the fundamental financials of Yahoo’s portal and Yahoo! Search show they are worth about $4 billion on a standalone basis.
There are no public companies directly comparable to Yahoo in terms of how its revenue and operating income are derived. However, for comparison’s sake, AOL Inc. (NYSE: AOL) and Time Inc. (NYSE: TIME) are reasonable proxies. An examination of their profit and loss statements (P&Ls) and market value give a good sense of what Yahoo’s core businesses are worth.
Yahoo should have GAAP revenue of about $4 billion this year. When one-time charges are backed out, operating income should be about $400 million. One of the arguments for discounting Yahoo’s value is that its revenue is shrinking. An argument for a higher market value is that the money it has from investments may allow it to expand in the future without taking on debt.
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AOL’s revenue should be about $2 billion this year. Its operating income will be about $225 million. AOL offers investors a higher number than that as a proxy for operating margin when income before depreciation and amortization are backed out. Unlike Yahoo, AOL’s subscription business is a healthy portion of its bottom line. At of the end of the most recent quarter, AOL had cash and cash equivalents of $136 million. AOL’s market cap is $3.4 billion.
Time’s revenue should be about $3.2 billion this year. Based on a calculation of operating income with adjustments similar to AOL’s, the figure will be about $430 million. Time had $204 million in cash and cash equivalents as of the end of the past quarter, and almost $1.4 billion in long-term debt. Time’s market cap is $2.5 billion.
It is worth considering how much larger Yahoo!’s domestic audience is compared to Time and AOL. According to July comScore data, Yahoo!’s unique visitors were 196.6 million to AOL’s 117.4 million. Time, Inc. properties as a whole do not make the top 25 web properties based on unique visitors. (Time, Inc. has tens of millions of print subscribers)
Yahoo, AOL and Time are not growth stocks, so to apply multiples for growth stocks is unreasonable. The argument has to be based largely on P&L and balance sheet consideration. With these as a measure, Yahoo’s core business is worth more than that of either AOL or Time, and even if it divests Alibaba and its position in Yahoo! Japan, it will have no debt. Against either of the other companies, Yahoo’s value should be higher — say, $4 billion or so.
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