Yahoo!'s Third Quarter Impresses Wall Street. Progress?

The oft-critiqued and Silicon Valley's favorite punching bag is no longer that. At least, not as much as it was. Heck, unlike Jeff Bezos or Ginni Romitty who are nowhere to be found on earnings calls, CEO Marissa Mayer actually showed up, with CFO Ken Goldman sitting right beside her. From $15/share at the time Mayer the company took over to over $40/share, Yahoo! is moving fast and they're giving shareholders something to be excited about. That something was a third quarter that saw $1.9 billion in sales and $6.70 of profit per share. Mobile revenue reached just over $200 million for the quarter and search revenue is up 6% from the same time a year ago, now at $450 million. 1% quarterly profit growth is certainly nothing to roister over, but Wall Street seems engrossed. Maybe because tech has lacked sexiness or because further shrewd moves like the Alibaba and Snapchat investments await for Yahoo!

Jim Cramer made an interesting point this morning on CNBC in saying that per dollar spent on acquisitions, Yahoo! has done a better job this year than Google. Nest, for instance, how is Google looking to return that $3.2 billion it cost to buy them with their hand-waving temperature technology? Yahoo! has spent close to $1.6 billion on acquisitions with the largest deal coming at the hands of Tumblr at roughly $1 billion. Mayer estimates that Tumblr will produce in excess of $100 million in revenue in 2015 due in large part to the 40% user growth rate (420 million new users, 1 billion users total, and 206 million new registered blogs) Tumblr is currently experiencing. Apparently, Tumblr is now finally profitable. At least if you're looking at the EBITDA numbers which take out taxes, depreciation, and amortization. Finding more efficient ways to monetize Tumblr, possibly through an increase in targeted ads since users are staying on the site longer now, could be a nice cash generator for Yahoo!.

Another positive from the earnings call was the rising percentage of mobile ad revenue (17%) in relation to their total revenue. Mobile, unlike PC, is not only the wave of the present but the future. Mayer's plan to institute share buybacks to shareholders is also an interesting plan as Yahoo! made $6 billion from the Alibaba IPO that took place a couple weeks ago and will look to buyback close to $3 billion of that sum. During Mayer's tenure as CEO, Yahoo! has given $7 billion in buybacks. To further satisfy Wall Street pundits Mayer will need to increase that 1% quarterly revenue growth in a sector that manages somewhere between 13-15% revenue growth per quarter. Yahoo! has the content and then the search advertising business in play. Is she banking on content driving user growth which in turn stimulates ad dollars to their bottom line? Possibly. But more astute acquisitions like Tumblr need to be made, especially now that they have some Alibaba cash to play with.

The Spin-off Boom is Alive and Well...It is also Warranted

Just a few weeks ago Ebay spun-off it's PayPal business in a very smart and soon to be lucrative way, simply based on the cash generation PayPal has produced and will continue to produce in the near future as a leader, though competing with Apple and newcomer Square, in the online payments space. Hewlett-Packard (or HP), like Ebay and Symantec, is joining the spin-off party. Quietly, shrewdly, and yet mostly unmentioned has been HP's stock rise since Meg Whitman took the company over in 2011. In the 3 years since, HP has risen 50% and trading over $30 a pop. Despite the fact that Lenovo and Dell have badly overtaken HP's command of the PC sales market. The current spin-off would allow HP Inc., which includes the PC and printing business, to be separate from HP enterprise services, which includes servers, networking and storage.

The enterprise division will have ample competitors including Oracle, IBM, EMC and Cisco. From a strategic standpoint, this split has validation. HP Inc. has a consumer centered focus with tangible items being sold vs HP enterprise which is completely corporate and software focused. The two businesses are clearly different and target totally different sets of personnel. The strategic differences outline an important point in support of activist investors who, at least of late, have been strong advocates for spin-offs. One CEO overseeing two vastly different profit generating entities is a tall task. According to tech researcher Crawford Del Prete, HP Labs will be part of HP enterprise and will hopefully drive HP's innovation going forward.

What will drive HP Inc.'s profit will be a harder question to solve since three quarters of their operating profit comes from print, not PC. At this point, investing in R&D or developing new PC products seems desperate and illogical when looking at the likes of Dell, Microsoft, and Apple.
There's reason to be skeptical based on their earnings report from August, as well. Stagnant third quarter revenue growth of $27.1 billion was right in line with analysts predictions. And with 50,000 layoffs expected by the end of the year (nearly 18,000 have already been laid off), their is room for skepticism with regards to HP from both a corporate governance and financial ascendancy perspective. The biggest room for growth does come from the enterprise side where the market potential, at least for HP, in innovation for servers, networking, and software services is much greater than that of PC or print. If you want an Ebay analogy, it's that the HP enterprise company could become the profit generating machine that PayPal is now. Though not nearly to the extent of PayPal. The ultimate assessment of HP's spin-off will come a year to two years down the line after each business entity's management has invested enough time and money to the appropriate places. For shareholders in the meantime, there are surely more dividends to come. And for stingy investors infatuated with low P/E stocks, HP is right up your alley. Until then though, this is just a spin-off. But one that makes perfect sense.

Can Snapchat be Yahoo!'s next Alibaba?

Marissa Mayer has done wonders for Yahoo! Though let's not forget Jerry Yang, either. The former Yahoo! co-founder slyly invested $1 billion in the Chinese bombshell Alibaba in 2005 for a 40% stake in the company. In 2012, Alibaba agreed to buyback half their shares at a $7.1 billion price tag. I'm not done. As of 3 weeks ago, Yahoo! has made close to $10 billion from Alibaba's recent IPO. Yes, the same Alibaba that is now worth $225 billion 3 weeks into being a publicly traded company. It's as if Alibaba felt bad about not being included in the "bubble" speculation talk when it was happening and now it has arrived. As fashionable late as ever.

Now, continuing her string of acquisitions that include hip and tech-savvy start-ups like MessageMe and Summly, Marissa Mayer has helped Yahoo! invest $20 million into America's favorite start-up darling (it only lasts for 10 seconds!), Snapchat. The move comes at a curious time as pressure mounts from some head honcho activist investor firms (Starboard) for Yahoo! to merge with AOL, another stagnant internet behemoth from decades past. Starboard's stake in Yahoo! is undisclosed but assuming it wants any control in board maneuverability or acquisition talk, the stake would have to be over 5%. Mayer's acquisitions in 2014, as eclectic as they have been, are starting to gain consistency and cohesion. 3 out of the last 6 start-ups Yahoo! has bought have been mobile related. Both Yahoo! and AOL have been floating around due to the exterior services that each company provides. Fantasy sports, Huffington Post,  and TechCrunch are still generating revenue for companies like AOL at high clips. AOL's terrific earnings report from August though was due to third party platform advertising which jumped an ungodly 60% for a revenue total of $457.1 million for the second quarter. For Yahoo!, Snapchat would be wise a investment for a company flatlining (or closer to nosediving) in the search business and sustaining moderate YOY growth in advertising dollars. Yahoo! cannot beat Facebook in terms of social media, nor Google for email or search.

These are problems. But investing in Snapchat allows them to have a piece of the pie in a company whose valuation should now be in the $10 billion range. Snapchat surprisingly (or not) rejected $5 billion offers from both Google and Facebook earlier this year. A return on investment identical to Alibaba will be near impossible and furthermore unnecessary. The strategy here is simple: if you can't overtake or compete with Facebook, Google, and even Amazon, then why not invest in their competitors? Snapchat's greatest asset is that it has data to our phone numbers. How to monetize the site will become a tricky matter but there are banner ads possibilities on some of the apps features. At 40 million users and close to 700 million snaps sent per day, Snapchat is now a social media wrecking ball. Partly to thank was their first mover advantage in addition to their simple and easy to use interface. $20 million seems like a measly stake in a company with no revenue model or positive cash-flow aspirations in the near future. But the same things were said five years ago when the Alibaba investment was made. We all know how that turned out.