Yahoo (YHOO) dispelled concerns that Q1 will be a disaster and released details of its last, best hope to stave off a Microsoft (MSFT) acquisition: Its own growth plan.
The plan calls for revenue and cash flow acceleration in 2009 and 2010 (after a retrenchment in 2008). It also provides support for Yahoo’s argument that it’s worth at least $40 a share.
We think the plan is more of a “best case” scenario than a “most likely” case (analysis below), but at least we now have concrete assumptions on which to evaluate Yahoo’s evaluation of itself.
If nothing else, the release of this plan should give Yahoo some leverage to extract a couple more dollars out of Microsoft (in part by helping Yahoo’s shareholders dream about a possible alternate future).
Here’s the release.
The plan calls for 2010 revenue of $8.8 billion (ex-TAC) and operating cash flow of $3.7 billion. This is up from $5 billion of revenue and $2 billion of operating cash flow in 2007.
WHAT YAHOO SAYS IT’S WORTH
Before analysing the sanity of the plan, let’s look at valuation:
Operating cash flow is not the same as “free cash flow.” Let’s assume that Yahoo will spend at least $700 million in capital expenditures in 2010, so that the company’s plan calls for Free Cash Flow of about $3 billion in 2010 ($3.7 billion of operating cash flow minus $700 million of CAPEX).
What would that be worth? As long as Yahoo’s growth prospects remained strong, the market would likely pay 20X-25X that expected 2010 free cash flow by the end of 2009, or $60-$75 billion. Add in, say, $10 billion of off-balance-sheet assets, and you’re left with a total market cap of about $70-$85 billion in early 2010, or about $50-$60 per share.
Discount that back to today and you’re looking at about $40-$50 a share. Thus Yahoo’s assertion that it’s worth at least $40 a share.
IS YAHOO’S PLAN REASONABLE?
Yahoo’s plan has three key assumptions:
- Display+video revenue grows $1.9 billion ex-TAC over the next three years (with company gaining market share).
- Search revenue grows $1.4 billion, in line with the search-market growth rate.
- Operating Cash Flow Margin increases about 4 points, from 38% of revenue in 2007 to about 42% in 2010.
- Display+video: We think Yahoo’s assumption is reasonable. Yahoo should gain share in display and video revenue (not versus Google, but versus the rest of the industry). One caveat: This absolute growth would almost certainly not be possible in a recession.
- Search: We’re far more sceptical here: Yahoo continues to lose query share in search, and we think it is reasonable to assume that Google will eventually capture 80%-90% of global query share. Given that Google’s growth rate is essentially the market growth rate, we don’t see how Yahoo can expect to grow search in line with the market rate.
- Margin: Reasonable–as long as Yahoo commits to running a leaner, meaner operation than it has in the past two years.
Bottom line: We think the operating plan is closer to a “best case” scenario than a “most likely” scenario. Unlike Yahoo’s previous puffery about its value, however, this plan does contain concrete assumptions, some of which are reasonable. The plan should give Yahoo leverage to extract at least a couple more dollars per share out of Microsoft.
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