Yahoo! Inc. is a mixed bag of strengths and weaknesses, and TheStreet Ratings team thinks the stock is a “hold” at current levels. Using a SWOT analysis, the team at Jim Cramer’s market news outlet said that though Yahoo looked strong at its core, its inability to grow made it hard to bet on.
Yahoo! Inc.’s strengths lie in its solid financial position, reasonable revenue growth, low debt levels and a decent return on equity. However, sluggish earnings growth and relatively low operating cash flow act as counter to the aforementioned strengths.
As such, TheStreet Ratings team found little evidence to justify the stock’s out performance relative to the broader markets, and rated it as a “hold.”
Yahoo! Inc.’s Strength Analysis
Yahoo! Inc. ’s revenue growth has managed to modestly outpace the industry average of 7 percent. On a year-on-year basis, revenue during the last reported quarter jumped 15 percent. However, this impressive growth in revenue seems to have failed to trickle down to the firm’s bottom line, as indicated by a decline in per share earnings.
Yahoo’s current debt-to-equity ratio is very low at 0.04. Along with this, the tech giant retains a quick ratio of 4.84, which adequately indicates the firm’s ability to take care of short-term cash needs.
The Notable Weaknesses
Yahoo! Inc. has appreciably under performed the S&P 500 and the Software & Services sector on the basis of Q-o-Q change in net income. Net income, during the last reported quarter, plunged 108 percent from a year earlier. It fell from a respectable $269.71 million to a dismal -$21.55 million.
Net operating cash flow has also declined to $307.95 million or 13.8 percent, versus the same quarter last year. Additionally, the firm’s cash generation rate is also considerably lower than the industry average.
The current gross profit margin is very high at 71 percent. However, Yahoo’s net profit margin of -1.73 percent under performs the broader industry average.
The Alibaba Overhang
Despite the risk of the deal not being tax-free, Yahoo! Inc. disclosed in a SEC filing last month that it was going ahead with the proposed spin-off of its 15.5 percent stake in Alibaba Group Holding Ltd by December.
Axiom analyst Victor Anthony thinks that “while there are risks of an IRS challenge post the spin-off, the risks are likely to be minimal.”
“In the event the IRS does challenge (post the spin-off), the process would likely take multiple years to institute and then take multiple years to resolve,” Anthony wrote to clients yesterday.
He further notes that “industry-like growth will likely take several more years”. However, he was quick to add that there are multiple avenues to increase shareholder value “including share repurchases and further headcount reductions.”
Yahoo! Inc. stock is currently trading around the $30-mark, and has dropped almost 40 percent since the start of the year. Wall Street continues to remain wary of the firm’s core search business.