Here's Why Yahoo! Inc. Shares Will Fly to $40

Does this analyst make a good case? Or is it just more noise from Wall Street?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Apr 14, 2014 at 11:43AM
Technology and Telecom

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Yahoo! (NASDAQ:YHOO) climbed 3% today after SunTrust Robinson Humphrey upgraded the Internet search giant from neutral to buy.

So what: Along with the upgrade, analyst Robert Peck planted a price target of $40 on the stock, representing about 22% worth of upside to Friday's close. So while contrarians might be turned off by Yahoo!'s sharp pullback in recent weeks, Peck's call could reflect a growing sense on Wall Street that the company's prospects are becoming too cheap to pass up.

Now what: According to SunTrust, Yahoo!'s risk/reward trade-off is rather attractive at this point. "Our analysis indicates that after adjusting for Yahoo!'s ownership of Yahoo! Japan and Alibaba, that investors are essentially getting the core Yahoo! asset for free," said Peck. "Taking the taxed current market value for Yahoo! Japan (which is down ~18% in the last month) and assuming a $150b IPO for Alibaba with a $200b ultimate value for Yahoo!'s stub remaining position accounts for $29 per share for Yahoo. Subtracting out the ~$4b of net cash, an investor is paying -0.2x EBITDA for Yahoo!'s core." Given how limited Yahoo!'s downside seems to be at the moment, it's pretty tough to disagree with SunTrust's upgrade.