Yahoo!'s Core A Work In Progress; Boenning & Scattergood Starts At Outperform

• Yahoo! Inc. YHOO shares are down 34 percent year-to-date, even after a 3 percent gain since October 12.
• Boenning & Scattergood’s Murali Sankar initiated coverage of the company with an Outperform rating and a price target of $41.
• Yahoo’s core businesses are transitioning, and as the company divests its main investments, it may become an attractive acquisition target, Sankar commented.

Yahoo’s core businesses are in a transition phase, from legacy Search and Display advertising to areas of higher growth. Analyst Murali Sankar said, however, that investors were currently focusing on taxation related to the company’s investments in Alibaba Group Holding Ltd BABA and Yahoo Japan, “which represent the majority of value in the stock.”

Sankar mentioned that current valuations did not reflect optionality of:

1. Taxation related to the Alibaba spinoff
2. Mavens and Programmatic growth potential
3. Yahoo’s strategic value

Current valuation reflects the worst case scenario of full taxation on the spinoff of Yahoo’s stake in Alibaba. The analyst pointed out, however, that unless Yahoo makes changes to its plans, the IRS would have to approve its tax-free spinoff application under the existing rules.

The Alibaba spinoff, expected to be completed in January 2016, will create more clarity around market valuation of Yahoo’s core business. “YHOO is also examining the monetization of its ($8BN) stake in Yahoo Japan, although timing and tax efficiency for this is uncertain,” Sankar wrote.

The growth driver of Yahoo’s core business is the Mavens business, or Mobile, Video, Native, Social. Yahoo’s investments and acquisitions in video content, apps/platforms and monetization technology indicate that the company intends to scale the Mavens businesses over time.

In the report Boenning & Scattergood noted, “As YHOO narrows its focus a focus and divests itself of its main investments, we believe it becomes a more attractive acquisition target for companies that are seeking to expand their footprint in digital content and advertising technology.”