Photo: Giorgio Montersino
This is a guest post from Martin Wolf, an M&A advisor focused on mid-market IT.On May 18, 2012, Facebook began trading, opening at $42 and closing at $38.23.
The last date that Yahoo topped $38.23 was January 17, 2006 when it closed at $40.11.
Since 2006, Yahoo has had a struggle for value, definition and growth. The company’s stock price has not been above $20 for more than two years.
Since, its IPO as a high-flyer, Facebook has traded from the high teens to low twenties for the past three months.
Both Facebook and Yahoo are turnarounds.
So, which company will be first to get back to the share price of $38?
My bet is on Yahoo – literally. I am a Yahoo shareholder.
A key reason I invested is that the company has had a lot of cash, specifically deferred cash on its balance sheet that has been tied up. Yahoo has just needed a way to extract it and turn it into cash.
Deferred cash, AKA “quasi-cash” can be investments that can easily be turned into cash, but does not appear on the balance sheet as cash.
On September 18th, Yahoo turned deferred cash into cash when it closed a deal with Alibaba, the Chinese Internet company. Yahoo had 40 per cent stake in the company and Alibaba repurchased half of it back. In the deal, Yahoo received approximately $7.6 billion — $6.3 billion in cash and $800 million in preferred shares of Alibaba, as well as $550 million under a revised licensing agreement.
In addition, Yahoo owns a 35 per cent equity stake in Yahoo Japan (YAHOF.PK), a public company that was formed in 1996 by Yahoo and Softbank. As of October 23, 2012 Yahoo’s stake in Yahoo Japan was valued at $7.5 billion (before taxes). It was reported in January 2012 that Yahoo wished to sell its stake.
Altogether, Yahoo’s cash equivalent holdings total $13 billion with about 1.18 billion outstanding shares. Cash per share is $11. Doing the maths, at a share price of $16.84 (as of market close 10/31/12), that’s how I arrived at 65.4 per cent as the amount of its share price backed up by cash.
Now let’s look at Facebook. The company has cash equivalent holdings of $10.4 billion with about 2.42 billion shares outstanding. At $21.11 per share (as of market close 10/31/12), it has 20.4 per cent the per cent of its share price backed up by cash.
Facebook’s turnaround situation was catalyzed when the stock sank after its IPO. I have written earlier that on a strict P/E ratio compared to a composite of other companies in the tech sector that it will be a long wait for the company to return to its IPO price of about $38.
Now, Facebook is making a big bet on mobile as the core of its future revenue streams. The company now sits with an enterprise value to 2012 EBITDA of 11.6 times (as of October 31, 2012).
It is projected to improve to 9.3 times in 2013; and 7.4 times in 2014 based on the expectation of significant growth in mobile revenue. It is a huge bet on future performance. Obviously these projected gains are built into the current stock price.
For example, Facebook’s estimated EBITDA for 2012 is $2.78 billion. And it is projected to grow to $3.59 billion in 2013, a 29 per cent increase. It suggests a significant sales climb in twelve months. In 2014 its EBITDA is projected to rise another 26 per cent to $4.53 billion. Not necessarily impossible. But, that is the turnaround an investor is betting on.
In contrast, Yahoo has been a company sitting in the same spot for a few years, like running on a treadmill. So, Yahoo, as a turnaround story, is not new.
When we look at the numbers, Facebook now sits with an enterprise value to EBITDA of 11.6 times. This means that Facebook has pressure to maintain even its current share price.
At the same time, Yahoo does not have high growth assumptions. So, the stock price is not predicated on future earnings.
Yahoo’s EBITDA is estimated to be $1.63 billion for 2012. It is projected to increase 5.5 per cent in 2013 to $1.72 billion – a modest gain. Its enterprise value to EBITDA of 4.2 times – much less pressure to maintain its current share price than Yahoo.
Now for Yahoo, what’s changed in the last 90 days is that it now has Marissa Mayer. She seems to be shoring up the balance sheet and not yet making big strategic moves. Instead, she is taking inventory.
The big acquisitions she has made have not been other companies, but great people. And she is assembling a management team, primarily from Google, that has demonstrated success in the past. As Mayer noted in her first earnings call, great people make the difference.
As a proof point, on October 25th, Yahoo bought the Justin Bieber-backed start-up, Stamped. Yahoo will be shutting the operation down — the reason for the purchase was to acquire the talent.
Meanwhile, Facebook’s earnings were announced on October 23 and beat Wall Street estimates. Fourteen per cent of its revenue now comes from mobile devices. On September 11th, CEO, Mark Zuckerberg was interviewed by tech writer, Michael Arrington at TechCrunch Disrupt. At that time, the CEO said that the company was committed to mobile. It apparently is.
So, looking at these two turnarounds, Facebook has an incredible 1 billion users. It is unsurpassed. The challenge is still ARPU (average revenue per user). To climb back to its IPO price and exceed it is an uphill battle.
For Yahoo, the company is reenergizing with new people and redeploying talent to mobile. The company is a strong content provider; as Meyer noted, “Our users spent 3.5 billion minutes watching our Olympics programming, reading articles and viewing photos.” Like Facebook, Yahoo has audiences that are not being leveraged.
However, she admitted regarding search: “While our search share is challenged, we are working closely with Microsoft to define the future of search.”
Yahoo can use its cash, as IBM has done, to buy back stock to have the business just make a marginal turnaround. In doing so, the share price would likely increase.
Facebook does not have that option because its share price is heavily tied to future earnings.
In watching this race to $38, it is like the turtle and the hare – and the turtle, in this case Yahoo, has a definite advantage.
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