Now Is the Time to Buy Yahoo!

I have been pretty hard on Yahoo! (Nasdaq: YHOO  ) this year, but my tough love is a smoochfest compared to the thrashing that investors have gone through. With the stock now just a bad penny poker hand away from its multi-year low of $11.25, Yahoo! is trading for a little more than a third of this year's peak.

Faith is clearly waning. The market is realizing that Yahoo! is no longer a bellwether and may not even be relevant. Faster-growing companies like Baidu.com (Nasdaq: BIDU  ) in China and Google (Nasdaq: GOOG  ) just about everywhere else are the real dot-com weathervanes.

How bad can it get in a year that has seen Microsoft (Nasdaq: MSFT  ) pull a buyout offer and Google walk away from a paid search outsourcing deal?

You're on your own, Yahoo!. You're sad. You're miserable. But why can't I take my eyes off of you?

What's a stock like you doing in a place like this?
I can't be the only one turned on by the tear-smeared mascara that Yahoo! is sporting these days.

It certainly isn't a conventional beauty. Did you even see the company's latest quarter? It was a mess. Profits, operating cash flow, and free cash flow all fell over last year's performance. Revenue moved just 3% higher before traffic-acquisition costs. It's not the niche, as Google and Baidu grew way faster. The problem, quite frankly, is Yahoo! itself.

Mr. Market's markdown bin is loaded with quality companies blessed with improving fundamentals. Why waste your portfolio's limited buying power on Yahoo!?

It's a fair question. I can think of at least three reasons to buy Yahoo! at this point:

  • Yahoo! is profitable, still generating roughly $1 billion in annual free cash flow, and has $3.3 billion in cash and marketable securities. In other words, it's not going away. Investors just need to pick out a bottom.
  • Microsoft CEO Steve Ballmer has given mixed signals about his company's interest in acquiring Yahoo!. Do you really think that a company that was willing to pay as much as $33 a share for Yahoo! a few months ago can't be talked into forking over $15 a share? Microsoft is a distant third in its search engine battle against Google. It can always make a play on the search engines just behind it like Ask.com parent IAC (Nasdaq: IACI  ) or Time Warner's (NYSE: TWX  ) AOL, but 3+4+5 is not greater than 2+3, no matter what your math teacher told you.
  • Yahoo!'s three meaty Asian investments -- that earlier this year were worth more than $10 a share -- are still valuable. Sure, Yahoo! Japan has been slammed. Alibaba.com's stock in China has taken a brutal 80% hit. South Korean marketplace Gmarket (Nasdaq: GMKT  ) has held up relatively better, but it's the smallest stake of the three. The upside here is that the fundamentals are still strong. Alibaba.com posted 49% spike in quarterly earnings this morning. Once sanity returns, these investments will be quick to bounce back.

Waiting on a catalyst
Add it up and Yahoo! can't lose at this point. It's a cash-rich money-generating powerhouse, so that should limit the downside at this point. Once Microsoft realizes that, it's not going to squander what may be its last chance to acquire the company it needs to take on Google at a rock-bottom price. Oh, and even if Mr. Softy really is over Yahoo! -- which I doubt -- there are plenty of overseas growth catalysts waiting to kick in.

Naturally, you may not see it that way. You may have lost faith in the Yahoo! executives. Well, there's good news on that front, too. Do you really think that Yahoo! investors will put up with the company's board if the share price doesn't recover in time for next summer's annual shareholder meeting? Of course not.

Yahoo! may have been a loser in so many ways this year, but it's finally at the point where it can't lose. It's ironic. It's contrarian. It's opportunistic investing at its finest.

Some other recent dot-com dealings:

Microsoft is a Motley Fool Inside Value recommendation. Google, Gmarket, and Baidu.com are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz would rather throw a search party than call for one. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On November 12, 2008, at 1:27 PM, fibreoptik wrote:

    "I can't be the only one turned on by the tear-smeared mascara that Yahoo! is sporting these days."

    Am I the only one that found that slightly disturbing? LOL

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