Yahoo

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Yahoo is a digital media company, known for its news, finance, sports, and email services. However, its valuation is mainly derived from its stake in Yahoo Japan and various investment holdings.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview & Revenue Distribution:

Yahoo’s business is primarily driven by its owned and operated properties and its strategic investments. The company’s revenue is derived from multiple streams which include:

  1. Display Advertising: This is a core revenue stream, where Yahoo sells ad space across its various websites and mobile apps.
  2. Search: Yahoo generates revenue through search advertising.
  3. Small Business: This consists of services like websites and email.
  4. Strategic Partnerships: Significant revenue comes from investments in companies like Yahoo Japan and Alibaba.

Industry Trends and Competitive Landscape:

The digital media space is fiercely competitive with a constant push for user engagement and ad dollars. Yahoo faces competition from:

  • Google: Dominates search advertising and various content areas
  • Meta: Powerful social media advertising and social media products
  • Other large players: Microsoft, Netflix, Amazon (for advertising), and several new entrants.

The shift toward mobile consumption continues to reshape the landscape, making it important to be well-positioned in both mobile and desktop. The dominance of cloud computing has allowed newer competitors to scale faster and cheaper. Also with the emergence of AI and the trend towards more personalized content.

Margins: Operating margins are a crucial aspect to note. For FY23, Yahoo reported adjusted operating income of $891 million vs a net loss in 2022.

What Makes Yahoo Different? Historically, Yahoo was a leading digital media company with a popular portal. That time is gone, they are not relevant in that space anymore. Today, the only thing that separates them is that they are sitting on a mountain of cash and profitable stakes in other companies, specially Yahoo Japan.

Financial Analysis: Looking at Yahoo’s financials, several key points emerge:

  • Revenue: Yahoo’s total net revenue for fiscal year 2023 was $8.32 billion, down 4.5% year-over-year, primarily due to the decline in its display advertising segment. Their adjusted EBITDA for the year was $1.95 billion.
  • Cost and Expenses: Their total cost and expenses for 2023 reached $7.44 billion, mostly from cost of revenue and research and development.
  • Profitability: The company managed to improve its operating income from a loss of $59 million in FY2022 to a positive of $891 million in FY2023, by implementing various strategic changes. This improvement is remarkable.
  • Cash Flow: Yahoo’s free cash flow for 2023 was $1.23 billion vs $1.1 billion in 2022.
  • Assets: The company’s total assets stand at $16.3 billion by year-end 2023. They hold $5.3 billion in cash, cash equivalents and marketable securities.

Balance Sheet Health:

  • Debt: The company’s long-term debt remains relatively low at $830 million, showing a reasonable capital structure.
    • Cash Position: A sizable cash reserve of around $5.3 billion provides a cushion and implies strong liquidity.
    • Overall: Balance sheet appears healthy, though the focus is on their investments rather than their operating businesses.

Balance Sheet Health Rating: 4 / 5 They have a strong cash position, and manageable debt, making their balance sheet healthy. However, the fact that they don’t produce value from their core business, reduces their rating.

Moat Analysis:

Yahoo’s moat is complex. Their main advantage in this era is they had an early start in providing free digital services (email, news, etc.) which gave them recognition.

However, the moat is not enough because there is no loyalty in these sectors. Users of these services can very easily migrate to a competitor. In the present state, the only real moat is their strategic investments, specifically Yahoo Japan, which they hold a controlling position. Yahoo Japan is very valuable for them and provides a stable cashflow.

Moat Rating: 2 / 5 The current moat is mostly tied to its stakes, especially in Yahoo Japan, which are valuable, but they are still reliant on someone else to make that business thrive. The operating businesses are under a lot of competition with little differentiation, resulting in the low rating.

Legitimate Risks That Could Harm the Moat and Business Resilience:

  • Competitive Pressure: Yahoo faces intense competition across all segments, requiring continuous adaptation and innovation.
  • Ad Revenue Vulnerability: Changes in advertising technologies or economic conditions could reduce their income from that sector.
  • Dependence on Strategic Stakes: Yahoo’s value is highly dependent on the performance of companies such as Yahoo Japan, which exposes it to market fluctuations in those companies and those industries.
  • Failure of Innovation: The inability to effectively innovate and create new profitable lines of business could lead to stagnation.

Understandability Rating: 2 / 5

While the basic services that Yahoo offers are easy to grasp, the company’s complex structure and dependence on its stakes, various investment decisions, and its lack of focus on core products, makes it less transparent. Therefore it is not easy for outsiders to understand the way Yahoo creates value, and therefore its true value.

Key Concerns and Management’s Perspective:

  • Management’s Focus: Management is focused on making sure that their businesses are growing at a consistent rate. On the latest earnings call, the CEO mentioned that the company has had good operating performance, they have invested more in their platform to have better profitability in the long term, they have bought back their own shares and also have had their financial discipline.
  • Focus on the Future: The company stated that they would be focused on the company’s strategic investments. The company is investing in high ROI businesses.
  • Concerns about core business They have not talked about their core business as a driver of value, implying that they don’t have any competitive advantage in this area anymore.

In summary, Yahoo’s future remains uncertain, but it has a solid foundation to go forward, although its strategy will need to be followed and analyzed very carefully.