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Can Yahoo Bounce Back? Wall Street Experts Share Their Opinions

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  • Shares of Yahoo! Inc. (NASDAQ: YHOO) extended its decline Wednesday morning and were lower by nearly five percent before noon.

    • Yahoo reported a worse than expected third quarter loss on Tuesday along with a disappointing guidance and outlook.
    • With expectations over Yahoo's outlook "reset," the Street remains mixed.

    Shares of Yahoo declined by nearly five percent late Wednesday morning after opening lower by less than two percent. The company reported weaker-than-expected third quarter results on Tuesday along with disappointing guidance.

    Here is a summary of what Wall Street's top analysts are saying.

    SunTrust: Yahoo's Strategy ‘Hasn't Worked As Hoped'

    Bob Peck of SunTrust Robinson Humphrey commented in a note that Yahoo's third quarter print and subsequent conference call was disappointing, not due to an earnings miss and disappointing outlook, but because of the lack of "tangible answers" to "key questions."

    Peck noted that Yahoo's core remains "challenged": 1) Despite a new search deal with Google, management is focusing instead on building the Gemini platform, thereby "suppressing" near term monetization revenue, 2) Revenue growth (ex-traffic acquisition cost) fell six percent year over year while organic revenue (ex-BrightRooll/Flurry) were even lower, 3) EBITDA declined 20 percent year over; adjusted for non-core items while core EBITDA was down 55 percent year over, 4) MAVENS GAAP revenue slowed down to 43 percent year over year growth from 60 percent last quarter, and 5) fourth quarter revenue and EBITDA guidance are 13 percent and 35 percent below the Street's estimate.

    Peck continued that after more than three years in "turnaround mode," Yahoo's core revenue and EBITDA remain "pressured." In addition, investor focus on the core and 2016 outlook is "building" as net revenues remain "elusive."

    Finally, Peck stated that Yahoo is expected to disclose a "cogent turnaround plan" with a sharper focus during the fourth quarter conference call. However, after 40 months "we don't know if investors have the patience."

    Shares remain Buy rated with an unchanged $40 price target.

    Axiom: ‘Hold Onto Shares' Until Alibaba Spin

    Victor Anthony of Axiom commented in a note that Yahoo's third quarter results reinforce the notion that its CEO Marissa Mayer continues to "face difficulty" with her turnaround plan.

    Anthony stated that Yahoo's results were "underwhelming" given the deceleration in growth across Search and Display, and a "sharp" deceleration in MAVENS. The analyst added that the company's fourth quarter guidance was "disappointing" and investments in Gemini "come by way of suppressed revenue" and the details of the new search partnership with Google is not known at this time.

    Anthony continued that Yahoo's shares "essentially function as a tracking stock" for Alibaba Group Holding Ltd (NYSE: BABA). As such, Yahoo's stock will continue to be "tied to the performance" of Alibab's shares until the spin-off is finalized in January. Accordingly, investors should "continue to own the shares" until then

    Anthony noted that post Alibaba spin, Yahoo could increase shareholder value by allocating a larger portion of their search quarries to Google as the contract terms are likely more lucrative compared to Bing. In addition, the company could initiate an "aggressive" share repurchase program, "aggressive" cost cuts and a tax-free monetization of Yahoo Japan.

    However, Anthony argued that he "struggles" to find a "meaningful" bull case for Yahoo's core business and as of now visibility into a turnaround is "very low." In addition, a "slimmed-down" Yahoo isn't likely to be an acquisition target. In other words, there exists certain "areas where bulls can continue to be excited" about Yahoo despite the struggling core business.

    Shares remain Buy rated with a price target lowered to $44 from a previous $45.

    Credit Suisse: New Search Partnership ‘Overshadows' Search Weakness

    Stephen Ju of Credit Suisse commented in a note that Yahoo's Search weakness was "overshadowed" by a new three-year partnership with Google. The analyst noted that the shortfall in Search was driven by weakness in query monetization on continued investment to ramp Gemini.

    Ju continued that Display results were "encouraging" as the company transitions from legacy desktop to MAVENS which now include Native, Tumblr, and BrightRoll. However, despite these improvements, the analyst suggested that the anticipated spin-off of Alibaba and the uncertain tax treatment will continue to "receive the majority of focus" as the upside potential on Yahoo's stock on a fully-taxed scenario is "not as compelling."

    Shares remain Neutral rated with a price target lowered to $53 from a previous $59.

    Barclays: The Turnaround ‘Hasn't Really Materialized'

    Paul Vogel of Barclays commented in a note that Yahoo's third quarter was "modestly disappointing" despite its focus on MAVENS where it continues to see strong overall growth.

    Vogel continued that Yahoo's consolidated results continue to be "lackluster." Meanwhile, the company continues to highlight growth in GAAP revenue, however the growth has not translated into net revenue or profit. As such, the analyst stated that "at the end of the day, the turnaround at Yahoo hasn't really materialized."

    Vogel also noted that Yahoo's stock "continues to be stuck" and is "almost 100 percent dependent" on the outcome of the Alibaba spin and the potential for further strategic alternatives involving Yahoo Japan.

    Shares remain Equal Weight rated with an unchanged $35 price target.

    Morgan Stanley: Yahoo Core Remains ‘Free Option'

    Brian Nowak of Morgan Stanley commented in a note that Yahoo's stock remains a "sum of the parts story" that is contingent on a successful spin of Alibaba which is now a question of "when, not if."

    Nowak continued that Yahoo's third quarter results "spoke to the continued challenges" its core business faces. However, the company is beginning to show an "increased willingness" to improve core earnings power and will narrow their strategy and focus on few products and improving profitability.

    The analyst added that by his calculations, Yahoo's core is currently being valued at negative $7.3 billion, implying investors who buy the stock receive the core as a "free option." He expanded that the core is "all optionality, although admittedly, the size of the optionality continues shrinking."

    Finally, Nowak suggested that Yahoo's current valuation is pricing in a fully taxed Alibaba split. The analyst continues to see a "successful" tax free spin in the fourth quarter or first quarter of next year.

    Shares remain Overweight rated with an unchanged $49 price target.

    Elsewhere On The Street

    Analysts at Bank of America maintained a Buy rating with a price target lowered to $46 from a previous $48.

    Analysts at B. Riley downgraded shares to Neutral from Buy with a price target lowered to $35 from a previous $50.

    Analysts at Piper Jaffray maintained an Overweight rating with a price target raised to $33 from a previous $32.

Latest Ratings for BABA

Sep 2016Deutsche BankMaintainsBuy
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Posted-In: axiom Barclays Bing Bob Peck Brian NowakAnalyst Color Analyst Ratings Tech


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