Yahoo (YHOO) has enjoyed a 100% run in the last year. But while the appeal of an Alibaba IPO and perhaps a big Yahoo dividend has led to big demand for YHOO in 2013, don’t expect that to last in the new year.
Yahoo’s domestic Internet and advertising business is damaged goods, the company is acquiring companies at a pace that smacks almost of desperation, and YHOO stock has only limited upside after this big run-up.
Here are a few reasons why:
Spending Spree: Sure, one could argue that the $1 billion acquisition of Tumblr will wind up being a wise investment that will move YHOO beyond its legacy “portal” model … eventually. But the company made more than 20 acquisitions in 2013, and, as Sam Biddle of ValleyWag put it last year, the company has “virtually nothing to show for it, beyond a reputation as a company that’ll clean your plate if you don’t like what’s for lunch.” The bottom line is still the bottom line, and hundreds of millions of dollars spent on acquisitions in the last year doesn’t seem to be even close to fueling any future earnings growth.
Declining Cash Pile: By the way, if you’re wondering how much money has been eroded on the front end, just look at the latest YHOO 10-Q from a few months ago. At the end of 2012, Yahoo stock boasted a cash stockpile of $2.7 billion with total assets of more than $5.6 billion. Now, cash is just $840 million and assets total under 3.6 billion. In other words, about $2 billion has flown the coop in just a year!
Declining Sales: That wouldn’t be a big deal if all that dry powder had loaded up the cannons for a big shot at growth. However, YHOO has seen three consecutive quarters of year-over-year revenue declines in 2013 and projections of another shortfall in Q4. So much for Marissa Mayer patting herself on the back for Yahoo achieving its first revenue growth in four years at the end of 2012. Looks like that was an outlier, not a trend.
If you want to believe that online display advertising is going to reverse its steady march toward lower margins — a phenomenon that’s putting pressure on ad rivals like Google (GOOG) and AOL (AOL) as well, by the way — then go ahead and stick with YHOO stock. Or if you think Yahoo’s spate of 2013 acquisitions will result in either the talent or the products it needs to evolve, then feel free to keep buying Yahoo stock even after the run-up.
But beyond the Alibaba IPO and its resultant cash infusion, there’s no light at the end of the tunnel for Yahoo.
Of course, what do I know? Yahoo has been the target of criticism for a while on this blog, and YHOO stock has continued to chug higher anyway — making my bearishness on Yahoo one of the worst calls I made in 2013.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.