What The Street Is Saying Ahead of Yahoo!'s Earnings

Yahoo! Inc. YHOO is scheduled to release its Q2 earnings on Tuesday. The media company's past few days have been action-packed, not least due to the announcement of a long-anticipated spin-off of its 15 percent stake in Alibaba Group BABA. Experts from around the Street weighed in in advance of Yahoo!'s big day. RBC Capital Markets In a report published Friday, RBC analyst Mark Mahaney said the Street's estimates for Yahoo! were "reasonable," with an earnings beat being as likely as a miss. He gave the firm a Sector Perform rating and a $52 price target. His estimates for net revenue ($1.5 billion), EBITDA ($251 million), and non-GAAP EPS ($0.18) were all in line with consensus expectations. The figures imply 1 percent year-over-year growth in revenue but a 26 percent decline in earnings. Mahaney noted search data as an important metric to watch. He said that Yahoo!'s total share of U.S. search queries is up 280 bps year-over-year but down slightly quarter-over-quarter. Its current share of 13 percent, according to the analyst, represents a historical downturn but short-term improvement over last year's 10 percent. He also mentioned advertising as an important revenue stream, highlighting that "ads sold" has been accelerating, with 21 percent year-over-year growth in quarter one. However, Mahaney cautioned, Google GOOG's earnings report, which indicated strong secular growth from advertising, could have negative implications for Yahoo!. Lastly, Mahaney argued that "Mavens revenue," which is growing fast, could offset the historical decline of traditional advertising. Bank of America Merrill Lynch In a report published Monday, Bank of America analyst Justin Post rated Yahoo! a Buy with a $56 price target. He highlighted Yahoo!'s announcement on Friday that it would spin-off its 384 million shares of Alibaba Group into a new company called Aabaco Holdings. According to Post, Aabaco will be an independently registered and publicly traded entity whose shares will be distributed to Yahoo! owners. He said that a key determinant of the Yahoo!'s value will be whether it can acquire tax-free status for the spin-off. If the IRS makes them pay, it could cost YHOO shareholders about $12 billion. Assuming tax exemption and given Alibaba's current trading price, Post said, Aabaco would be worth about $32 billion. Nevertheless, he maintained, the possibility of the spin-off being canceled if it's not tax-free is represents a significant risk. Post quantified Yahoo!'s heavy exposure to the Chinese shopping company, saying that a 10 percent decline in Alibaba would, ceteris paribus, correspond to a 7 percent decline in Yahoo. But despite all of the uncertainty surrounding Aabaco, the analyst expects things to proceed smoothly and expects a "positive set up for the stock into earnings on [Tuesday]." SunTrust Suntrust analyst Robert Peck, in a report published Monday, also gave YHOO a buy rating. Like Post, he expressed uncertainty about the spin-off's tax status. Although he noted precedents for exemption, particularly highlighting Liberty Media Corporation, which held DIRECTV DTV stock, he also said that the IRS is "reconsidering its ruling policies." According to Peck, there is probably limited visibility regarding if and when the IRS will label Aabaco tax-free, so until the time comes, onlookers may be stuck in a waiting game. But even tax exemption could have potential downsides. Particularly, Peck said, Aabaco's tax-free status would be threatened if Yahoo!'s ownership structure were to change significantly. According to him, this would minimize the media company's attractiveness as a candidate for acquisition. Clearly, there is a lot to consider as Yahoo! prepares to release its earnings on Tuesday. The stock has been bouncing up and down so far today, currently trading down just slightly.