Last week, I was in a van with a group of employees from Yahoo! (NASDAQ:YHOO). We were on our way to the Jemez Valley in New Mexico to attend the Yahoo! Time Capsule event. That night, thousands of images -- submitted from Yahoo! users around the globe -- would be projected on a red-rock mesa as Pueblo Indians sang and danced. The images were also beamed into space via a 40-watt laser.

Yes, it was truly a unique form of user-generated content. But I had to put my investor hat on and ask: "Is this just another sign of how Yahoo! has lost touch?"

No way. Thinking back to the van ride, I realized that Yahoo! has incredibly smart and creative people. They also work effectively in teams; often, the members are in different parts of the world.

The result is great innovation, which has what has made Yahoo! a great company despite tough competitors and the dot-com implosion.

So I'm not surprised that despite the size of Yahoo!, it can still internally develop standout properties. One example is Yahoo! Answers, a community gathering in which users can post any type of question. Of course, Yahoo! does not provide the answers to those questions; its global community of users does.

According to comScore, Yahoo! is the No. 1 trafficked site on the Web, with 113 billion page views in September. Google is sitting at No. 2 with only 85 billion.

When Yahoo! buys a property, it is usually successful in making that property much more valuable. Take its purchase of the online photo-sharing site Flickr. It now gets about 20 million users per month and has a database of more than 270 million photos, with about 1 million photos uploaded daily. Yahoo! calls the activity at this type of property "social media," and it will be vitally important to the long-term success of Yahoo! After all, even though Yahoo! has many talented employees, it still cannot match the collective wisdom of hundreds of millions of people.

No doubt, this wisdom is going to become increasingly valuable to advertisers, who will ultimately gain a much better understanding of customer behavior. Moreover, it will help Yahoo! provide better search, in that search is going to move beyond the current approach -- algorithms that measure links between sites -- and into what Internet users are actually interested in.

For a company the size of Yahoo!, innovation is no easy feat. Just take a look at Google. Other than paid search, what other explosive property has Google developed? Then again, maybe Google doesn't have to -- given that it has developed a virtual cash register with its highly scalable paid-search system.

However, Yahoo!'s talented engineers have been developing a much-improved paid-search system of their own, known as Project Panama. Essentially, Project Panama will make it easier for advertisers to place ads alongside Yahoo!'s massive volume of search queries. There are tools that help list multiple keywords, allow for better tracking, and so on. But most importantly, the system will use the Google approach to paid search, in which ad placement is based on the number of clicks, not on how aggressive the bidding is.

Despite the fierce competition, Yahoo! is No. 1 in unique users and average page views. The number of unique users grew 19% over the past year to 418 million, and the number of average page views climbed 24% to 3.985 billion.

This activity translates into a high-profit business, despite some recent weakness. In its third quarter, revenues increased 20% to $1.12 billion. Because of its high margins, the company generated free cash flows of $288 million in the quarter. (Excluding a land purchase, the amount would have been $400 million.)

Being sensitive to shareholder interests, Yahoo! has been returning a lot of cash back to shareholders through buybacks. In the third quarter, it exhausted a $3 billion buyback and has authorized another $3 billion. Yet the company still has $3.2 billion in the bank.

Yahoo! also has some other juicy assets on its balance sheet, such as equity interests in Yahoo! Japan, which includes a variety of services such as auctions, search, and travel; Alibaba, which is the biggest auction site and second-biggest search engine in China; and Gmarket (NASDAQ:GMKT), which has a variety of powerful online properties in South Korea. In all, these assets have an aggregate value of $9.4 billion, or about $6.50 per share.

So if you strip out these equity interests and the cash on the balance sheet, you see that Wall Street is valuing Yahoo!'s operating business at roughly $24 billion, or about 13 times operating cash flows for the trailing 12 months.

To put things in perspective, it is not uncommon for equity firms to take companies private at cash-flow multiples of 10 to 15. For example, look at Harrah's Entertainment (NYSE:HET). The company is going private at 11.5 times cash flows and even has $14.8 billion in debt.

Basically, with Yahoo!, you get the biggest user base on the Internet, $9.4 billion in emerging-market assets, strong cash flow generation, and the No. 2 player in paid search.

Yes, even great companies go out of favor; but for investors who have some patience, Yahoo! is definitely worth waiting for.

Duel on!

Yahoo! is a Motley Fool Stock Advisor recommendation. Get your free Stock Advisor market report today!

Fool contributor Tom Taulli does not own shares of companies mentioned in this article. He is currently ranked 22nd out of more than 12,000 players in Motley Fool CAPS, the Fool's new stock-rating community. The Motley Fool has a disclosure policy.