Must-know: Why is Yahoo undervalued versus its competitors?

Yahoo and its competitors

Yahoo’s trailing P/E is almost in line with its peers but it’s below Google (GOOG), Facebook (FB), and Chinese Internet giant Baidu (BIDU). Yahoo’s operating margin is also on the lower side compared to its peers. Yahoo has been losing market share to rivals Google and Facebook in the digital advertising space, which is getting more competitive with the entry of Twitter (TWTR), Amazon (AMZN), and Linkedin (LNKD). Yahoo has revamped its advertising platform and hopes to benefit from mobile advertising efforts in the upcoming quarters. Facebook (FB) saw its shares surge recently as mobile ad sales continued to increase.

Yahoo has been lagging behind its peers in terms of revenue growth. In terms of outlook for 1Q 2014, Yahoo expects GAAP revenue in the range of $1.12 billion to $1.16 billion, and it expects revenue ex-TAC to be in the range of $1.06 billion to $1.1 billion. Adjusted EBITDA is expected to be between $290 million and $230 million, and non-GAAP operating income is expected to be between $130 million and $170 million.

Yahoo saw its stock price rise last year due to its share repurchase plans. The company sold half its stake in Alibaba in 2012 and said it would return most of the $3.65 billion in proceeds to shareholders. During the nine months ended September 30, 2013, Yahoo said it repurchased 123 million shares for $3.1 billion. In November 2013, the company proposed to raise $1 billion in convertible debt and also boosted its stock-buyback plan by $5 billion. On its recent earnings call, Yahoo said it has increased its cash position by realizing a $304 million net gain via a Japanese yen hedge, and generating strong free cash flow from operations. The company repurchased 129 million shares at an average cost of $25.95 per share, for a total of $3.3 billion during 2013.

Although many analysts cut their price targets on the back of lackluster results, some are still optimistic due to Yahoo’s stakes in Alibaba and Yahoo Japan and predicted growth in Tumblr.

For related analysis, see the Market Realist series Must-know: An investor’s essential guide to Google.