I'm as big a fan of share buybacks as the next investor, but I can't get behind Yahoo!'s (Nasdaq: YHOO ) plan to repurchase as much as $3 billion of its own stock over the next three years.
Yes, Yahoo! shares hit a fresh 52-week low yesterday, but this doesn't mean that the meandering search engine has hit bottom. Keep in mind that the board approved the buyback a week ago -- when its stock was trading 7% higher.
In other words, Yahoo! shareholders are already in the hole if any of its shares got bought back over the past week.
Yahoo!'s bottom line is improving, but that's off last year's depressed profit levels. If we go by the top line, analysts see revenue climbing just 2% this year, and less than 5% come 2011. Yahoo! needs to buy growth more than it needs to whack away at the denominator in its earnings multiple.
In other words, instead of throwing cash at a stock that may very well head lower, Yahoo! should be cracking open its piggy bank for acquisitions that will help drive results higher.
Bye, bye, buy
Yahoo! was packing $4.2 billion in cash and marketable securities on its balance sheet by the end of the first quarter. When you tack on the free cash flow that Yahoo! is likely to generate over the next three years, earmarking $3 billion for a massive buyback will hardly force Yahooligans into poverty.
Still, the company should be out there on the mother of all dot-com spending sprees. Its recent cash hoard may pale in comparison to the $26.5 billion with which Google (Nasdaq: GOOG ) closed out the same quarter, but Yahoo!'s still got an ace up its sleeve. While Google's gargantuan size means that even its most minor moves draw antitrust scrutiny, Yahoo! could potentially pile up purchases without raising an eyebrow.
Choir of acquirers
Yahoo! added content creator Associated Content two months ago, but it still needs to bulk up even more.
I went over five ideal buyout candidates after Yahoo! reportedly fell short on a deal to snap up The Huffington Post. I still like all five of those companies as buyout bait, but let me give you four other names that would look great providing incremental growth for Yahoo! CEO Carol Bartz.
- AOL (NYSE: AOL ) is an obvious target. This 1990s dot-com rock star has fallen even harder than Yahoo! Despite its brand and global empire of traffic-heavy properties, Yahoo! could easily absorb AOL's roughly $2 billion enterprise value, then sell off its access business or non-core assets to drive its eventual price tag lower.
- QuinStreet (Nasdaq: QNST ) is trading for a lot less than its $15 IPO price from five months ago. Specializing in vertical marketing, QuinStreet delivers pre-qualified leads to advertisers through highly targeted campaigns. The company has been profitable for a few years now, even managing to grow its top line during the recession.
- Travelzoo (Nasdaq: TZOO ) is the online publisher behind its namesake Top 20 weekly travel deal emails, with 17.8 million willing recipients. Yahoo! needs access to advertisers paying top dollar for leads, and having more skin in the lucrative travel game makes perfect sense.
- Health Grades (Nasdaq: HGRD ) runs popular health-care-related websites including WrongDiagnosis.com and its namesake site, which provides ratings on hospitals and physicians. Its collection of sites attracted 57.4 million unique visitors during this year's first quarter. Revenue and earnings are growing, and this is clearly a valuable place for an online advertiser to be. I recommended the much larger WebMD (Nasdaq: WBMD ) for Yahoo!'s shopping bag last month for similar reasons, and Health Grades provides bite-sized access to this significant dot-com niche.
Collectively, these four companies command a market cap of $3 billion. I believe that Yahoo! would get more bang out of its buck with these transactions than it would simply trying to catch its shares on the way down.
Yes, Yahoo! would likely have to pay a decent premium to acquire these companies, but the opportunity to grow again should be far more alluring than shrinking its outstanding share count.
What should Yahoo! buy next? Share your thoughts in the comment box below.
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