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Yahoo Prospects Are Rising

03/12/12 12:06:33 PM
by Billy Williams

Yahoo has seen better days, but its prospects are on the rise as big moves in technology brew and two giants begin to battle it out.

Security:   YHOO
Position:   Buy

Yahoo (YHOO), the former rising star of the stock market, has seen some of its luster tarnish since the go-go volatility of the dotcom era, where Yahoo's parabolic rise in its stock price was on the forefront. In its day it was on the cutting edge of search engine technology and user-friendly usability, not to mention the cool factor among its searchers who were rabid fans, but sadly, it found Google too much to compete with and lost its prime status among search engine users. Currently, though, it appears to be regaining some of its former luster.

Today, Yahoo, together with its subsidiaries, operates as a digital media company that delivers personalized digital content and experiences through various devices worldwide. It offers online properties and services to users, and a range of marketing services to businesses. The company also offers marketing services, such as display and search advertising, listing-based services, and commerce-based transactions to advertisers.

Yahoo also owns 40% of Alibaba, a consumer ecommerce company focused on the Chinese market, and 35% of Yahoo Japan, and has $2 billion in cash. The value of these three units is $20 billion. See Figures 1 and 2.

FIGURE 1: YHOO. Yahoo was a major player in the dotcom era before the crash occurred.
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The stock market is valuing Yahoo at $18 billion, revealing that there is no financial risk in owning Yahoo while getting and all its other US businesses for free, which are worth billions in today's current valuation.

Yahoo's patents are hidden gold. The company is just beginning to use them to extract money from companies like Facebook, which have been using them for free. If Facebook is using these patents, it's nearly certain that Google is too.

Recently, Yahoo threatened Facebook, demanding licensing fees for use of its patents. Last year, "IEEE Spectrum," a technology publication, valued these patents as among the most valuable in communications and Internet services.

FIGURE 2: YHOO. Today, Yahoo's stock has been aimless, but with Apple and Google preparing to do battle, stockholders could benefit in a major way, given Yahoo's huge value.
Graphic provided by:
While all of these reasons make Yahoo a compelling value play for the stockpicker, one thing is particularly interesting in the form of an article about why Apple should buy Yahoo in a recent issue of "Forbes" magazine. The scenario that is detailed creates an attractive basis for the decision on the part of Apple to acquire Yahoo but also to deal a strong blow to Google., one that Google may not recover from, or at least take years to recover from.

Before he died, Apple cofounder Steve Jobs purportedly promised to wage "thermonuclear war" on Google. He believed that Google stole all of Apple's ideas to make the Android smartphone software. Worst of all, it happened when Google's chairman, Eric Schmidt, was on Apple's board of directors and was privy to all of the iPhone's secrets.

Jobs' exact words on Google apparently were: "I'm going to destroy Android, because it's a stolen product. I'm willing to go thermonuclear war on this. I will spend my last dying breath if I need to, and I will spend every penny of Apple's $40 billion in the bank, to right this wrong."

Apple now has $97.6 billion in cash, a market value nearing $500 billion, and the ability to buy Yahoo on the cheap. This gives Apple a way to destroy Google's existing search and advertising businesses. Apple will integrate Yahoo Internet services and divert search engine traffic away from Google, squeezing Google's search business that is currently responsible for more than 90% of its profits.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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