Friday, September 19, 2014

* Yahoo! (YHOO) - Worth Zero Post BABA IPO? Equity Market Has Lost its Mind (5 Charts)

Share on StockTwits

YHOO is trading $40.81, down 3.0% with IV30™ down 16.1%. The Symbol Summary is included below.

Provided by Livevol

Alibaba is trading at $92.41 on the first day of its IPO.

Provided by Livevol

Given the current price of YHOO and BABA, the equity market reflects a valuation for YHOO's core business (ex BABA) of -$0.50 / share.  Negative.

I will show you some of the fundamental measures for YHOO, which, while some aren't particularly "good," the firm is not "negative" and likely worth over $10B on it's own.

The valuation I reflected above comes from this excellent article from BUSINESS INSIDER:
Yahoo Stock Gets Crushed As Alibaba IPOs — Core Business Now Valued At Less Than Zero, written by NICHOLAS CARLSON.

Here's the math for figuring out the value of Yahoo's core:

Start with Yahoo's $40 billion market cap.

Subtract the $10.5 billion in cash that Yahoo will have after receiving the proceeds of its Alibaba stock sale and paying taxes on its gain (Yahoo won't have to pay these cash taxes for a while, so it will retain the cash for now).

Subtract the value of Yahoo's 35% stake in Yahoo Japan. It's worth about $5 billion after taxes.

Compute the value of the 401 million shares in Alibaba that Yahoo still owns, which is worth about $25 billion after taxes with Alibaba trading at $90 per share.

What you're left with is the value the market is attributing to Yahoo's core business: About -$500 million with Alibaba trading at $90.

Let's turn to some fundamental measures which blew my mind considering the current valuation of... zero...

Revenue (TTM)
So, this isn't a "good"chart.  YHOO revenue has been declining  for six years now... But let's not lose sight of the forest for the trees.  In the trailing-twelve-months, YHOO has generated $4.6B in revenue.

Gross Margin %
In the Internet Software & Services industry (YHOO's industry), gross margins are huge just by the nature of the business.  We can see YHOO sits at ~72%  and that margin has risen over the last six quarters from ~67%.

Gross Margin % (Comp. to Peers)
So, that 71% number seems bananas it's so high, but if we compare YHOO to a peer group in its industry (and market cap > $2B), the firm is right about "middle-of-the-road." So what?... This firm isn't "the worst," or even close... Gross Margin % is comparable to peers and in absolute terms, is enormous.

Net Income (Earnings) TTM
So this is an ugly chart... Net Income (TTM) has dropped from ~$4B for the year ending in 2012, to now $1.3B.  Those are earnings.

Earning Margins (Comp. to Peers)
The next question, of course, is what YHOO's earnings from continuing operations look like relative to peers.  Well... right about middle of the road.  Again, in no way is YHOO tumbling down an irrecoverable rabbit hole... at least not yet.

All of this is happening in the face of what was an unprecedented level of risk:
 Yahoo! (YHOO) - Stock Breaks 8-Year High; Risk Explodes to Unprecedented Levels

The 'risk' is now falling risk per the option market. Finally, the Options Tab is included below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).  That number from the very first image is down 16% today.

YHOO has earnings due out in the October options expiry. Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$35.50, $46.50].

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.

1 comment:

  1. This is really fantastic news Moreover Worth Zero Post BABA IPO? Equity Market Has Lost its Mind thank you for sharing it with us!