Yahoo! Handcuffed By Alibaba Spin-off?

Yahoo! Inc. YHOO reports its FQ2 '15 results after the closing bell today. Both Estimize and Wall Street are predicting a fall in EPS year-on-year (YoY). The Estimize and Wall Street consensus predict an EPS figure of $0.18. The Estimize community have assumed a revenue figure of $1.029B compared to the Wall Street assumption of $1.028B.  Yahoo's stock has underperformed YTD with a negative capital return of -21.65% relative to the NASDAQ which has managed to rise 10.42% (YTD).

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Yahoo's stock price has recently come under pressure as investors become nervous due to the possible changes to how the IRS taxes corporate spin-offs. Yahoo! still has a circa $30B stake in Alibaba (BABA) and any IRS changes may impact its strategy to spin-off the rest of its holdings. Yahoo! successfully booked $9.4B when Alibaba successfully listed on the NASDAQ in September last year. Yahoo! just recently announced that it intends on selling off 384M shares in Alibaba into a new entity called Aabaco Holdings. If Yahoo! cannot acquire a tax-free status for its Alibaba spin-off, it has been estimated that it may cost shareholders up to $12B. If the tax-free status is not obtained and Yahoo! decide to not proceed with the spin-off, this also places risk on Yahoo! shareholders. Yahoo! CEO Marissa Mayer has recently told investors that the spinoff process is "proceeding as planned." Investors will be eager to hear management's comments on the spinoff and the timeframe in which the sale is expected to be completed.

Yahoo's underperformance can also be attributed to the company's inability to grow its revenues organically. Yahoo's FQ1 ‘15 result revealed a fall in revenues of circa 4% YoY. A concern also exists surrounding the company's acquisition of Tublr. Yahoo! paid $1.1B in cash and stock for the blogging website which is quickly approaching having 500 million users. Despite its growing user base, Tublr is yet to earn $100M in revenues annually.

Despite the poor revenue growth, Yahoo! are exploring a number of different opportunities which could help drive sales growth in the future. Yahoo! have recently announced that they intend to tap into the online fantasy sports games market. They intend on offering pay-to-play fantasy sports games and compete with key players such as FanDuel and DraftKings.

Today's report will be closely watched by the market. Pressure continues to mount on Marissa Mayer as she approaches her 3 year anniversary as CEO. In order for Yahoo! to build momentum, Marissa will need to begin to demonstrate to investors that she has what it takes to increase Yahoo's top line revenue growth. With a disappointing FQ1 '15 result, Yahoo! needs a solid report today in order to stop the share price plunge.

(Photo Credit: Webgrisu)