Core Weakness, Alibaba And Japan In Focus After Yahoo's Earnings

Yahoo! Inc. YHOO announced strong second quarter financial results and a weak third quarter guide on late-Tuesday. Following the report, several major Wall Street research firms weighed in on the figures.

SunTrust

SunTrust’s Bob Peck thinks the pending IRS decision is still the largest driver of the stock. So, in spite of weakening fundamentals, the firma maintains its Buy rating on the stock, based on the value of the Alibaba Group Holding Ltd BABA and Yahoo Japan Corporation (TYO:4689) investments.

The analysts add, “While Yahoo's core business was challenged three years ago, after $6B of investment, revenues and EBITDA continue to decline.” As the Alibaba spin and potential Yahoo Japan rationalization gets closer, the experts believe investors will shift their focus to the performance of the Core. Importantly, they think, “if progress is not made on stabilizing Core financials, pressure will mount from investors.”

Citi

Citi, for its part, was surprised by Yahoo’s second quarter results, which topped expectations. The analysts explain that revenue upside was “driven by display advertising (offset partially by search ad revenue below our est) and EBITDA, EBITDA margin, and earnings upside driven by Product Development and Sales & Marketing expenses each below our estimates.”

On the other hand, third quarter guidance was “modestly disappointing,” they add. In addition, they highlight that management did not provide a substantive update on the Aabaco spin-off.

Overall, the firm believes the stock is worth more than the 3-5x EBITDA at which they think it is currently valued, even though its core business continues to face headwinds. Thus, the analysts maintain a Buy rating and $55.00 price target on the shares.

Cantor Fitzgerald

Analysts at Cantor warn that Yahoo is “still not out of the woods yet,” but maintains a Buy rating and $62.00 price target on their sum-of-the-parts analysis (higher valuations for Alibaba and Yahoo! Japan, slow recuperation of the core business, and a substantial $2.7 billion share buyback).

While GAAP revenue growth saw the largest acceleration in almost a decade, “the all-important revenue ex. TAC remains challenged at +0.3% Y/Y and is likely to remain so in 2H:15 due to increased investments and tougher comps,” a report issued Wednesday notes.

Bank of America Merrill Lynch

Finally, Bank of America Merrill Lynch reiterated a Buy rating, but lowered its price target from $56.00 to $55.00 to reflect lower value of the core business. The analysts mention a few key drivers for the stock going forward:

1) The performance of Alibaba’s stock

2) The Alibaba tax ruling

3) The potential for the 12 percent Alibaba valuation discount in the firm’s model to decline, if a positive tax ruling were to be achieved.