RBC Asks, 'Will Yahoo's Fundamentals Ever Base Out?'

• Yahoo! Inc. YHOO shares are down 13 percent since January 4.
• RBC Capital Markets’ Mark S. Mahaney maintained a Sector Perform rating for the company, while reducing the price target from $42 to $33
• Yahoo announced better-than-expected Q4 results, but weaker-than-expected 2016 guidance, Mahaney stated.

Yahoo reported its Q4 net revenue at $1.00B, ahead by 5 percent of the RBC and Street estimates. Net revenue declined 15 percent y/y, implying deteriorating asset risk. The company’s EBITDA came in at $215MM, ahead by about 13 percent of the RBC and Street estimates.

EBITDA margin contracted significantly during the quarter, with EBITDA down 47 percent y/y, which is a cause for concern, analyst Mark Mahaney commented. Moreover, Yahoo’s guidance for both Q1 and 2016 were disappointing. Management provided a detailed strategic plan to return the company to growth in 2017.

Our 2016 Net Revenue & EBITDA estimates are reduced 8% & 14%, respectively. 2016E EBITDA now at $782MM, the lowest level in over a decade. $33 PT is based on a SOP: 4x EV/EBITDA multiple to our ’17E EBITDA of $900MM, adjusting for $6.1B in YE 2016E Net Cash and BABA and YJ stakes (both fully taxed at 35%).

Mahaney pointed out that Q4 marked the third straight quarter of “a material reduction in our YHOO estimates.” He added that Yahoo’s shares were down only 2 percent in the after-market, which seems to signal “a washed-out stock.”

“The stock-picking lesson may be that stocks don’t wash out until fundamentals base out,” the analyst said. Yahoo’s Q1 guidance calls for another EBITDA decline of around 50 percent y/y and the company continues to be “a “really, show me” story.”

Mahaney expressed concern regarding strong headwinds for Yahoo from robust growth in the ad platforms of Facebook Inc FB, the rapid rise of Programmatic ad buying, and the solid expansion of the platforms of Alphabet Inc GOOGL.

“Yes, YHOO looks highly inexpensive on a SOP basis. But until we gain confidence that fundamentals & estimates have based out, we can’t recommend the stock,” the RBC Capital Markets report noted.