Yahoo is dead money for now

Valentine’s Day was a busy day for Yahoo (NASDAQ:YHOO). First, Kara Swisher from All Things D reported that talks between Yahoo and its Asian partners had broken off throwing the sale of Yahoo’s stake in Alibaba in limbo. Immediately, Yahoo’s stock tanked and closed down 5% on the day. Then that same day still, hedge fund manager Daniel Loeb of Third Point filed a statement with the SEC disclosing his intentions to nominate 4 members (including himself) to the Yahoo Board.

The combination of Yahoo’s now cheaper stock price and Loeb’s move has tempted many to jump in the stock on the premise that Loeb will prevail and bring much needed change to Yahoo’s Board. That maybe true but until that happens, Yahoo in my opinion is dead money and likely to go lower than higher.

Investors need to know that if the proxy fight is settled by a vote, that eventual vote for Board nominees will not be settled before June 2012. Last year’s annual meeting was held on June 23 and if it takes place around that same time this year then we are basically 4 months away. During this 4 months period Yahoo’s share price will be impacted by overall market conditions as well as its first quarter earnings. Yahoo is likely to announce Q1 earnings around mid April and they are likely to disappoint rather than beat. Any beat will probably be based on drastically lower expectations. Yahoo has been in an indeterminate state since the Board abruptly dismissed then CEO Carol Bartz last September. Yahoo’s stock hit its 52 week low at $11.09 a few weeks before Bartz’s departure. I think we are at that point today. If the prospects of a sale of its Asian assets are off the table for now then there is little catalyst to justify a price that is only a mere 10% below that when the sale of those assets was a near certainty. As for the earnings I mentioned earlier, one has to assume that they will not come in too rosy. Yahoo has been in a state of confusion ever since Bartz left, and now that it hired a new CEO – Scott Thompson – it is in a state of transition. Employees are probably more worried, and panicked, about keeping their jobs than attending to their jobs as the new CEO tries to figure out what is the best strategy to pursue and which managers and employees are the most equipped to implement this strategy. And let’s not forget that Yahoo has been losing a steady stream of senior managers over the last 12 months which does not make for the smoothest running earnings machine.

Now I think there is tremendous value in Yahoo shares but with the shares trading north of $15 this leaves more downside risk in the near term if a divestiture does not take place. We need to remember that Yahoo was trading at more than $18 less than a year ago last May when the sale of Asian assets was not really overtly being discussed at all. The stock quickly declined when the Alipay fiasco was made public which caused investors to question Bartz’s (and Jerry Yang’s) leadership and competency as well as the business practices of Yahoo’s Chinese partners. With Bartz and Yang gone and the issue with Alipay rectified, I think we can get back to $18 a share when: 1) investors have the same confidence in the new CEO as they did in Bartz when she was first hired and 2) Yahoo has regained its earnings momentum. In the meantime I will avoid the stock and only go back in at much lower levels.

Disclosure: I owned Yahoo shares up until January 4, 2012. I no longer maintain any position.

Tagged Alibaba, NASDAQ:YHOO