Marissa Mayer's steady hand offers new hope for Yahoo

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There is hope, for the first time in a long time, at Yahoo Inc. And it is entirely due to new CEO Marissa Mayer.

Yet Yahoo is still Yahoo – a company more than a decade past its zeitgeist moment, an ancient collection of dust and bones by technology industry standards. The fact Yahoo is hitting new 52-week highs after Ms. Mayer's first conference call suggests undue enthusiasm for the stock and what even a Google alum can do to turn the company around.

A closer look and a step back, however, suggests something different. Yahoo has had a healthy balance sheet and valuable Asian properties for some time. Those holdings now act as a buffer for investors who want to buy in cheaply and see if Ms. Mayer might actually improve Yahoo.

The shares have risen this week despite no promises of radical change. "The biggest surprise was the lack of surprises," Macquarie USA analyst Ben Schachter wrote after Ms. Mayer's conference call. "… She laid out a strategy that doesn't require a 'giant pivot,' [but] seems to once again emphasize execution, a recurring theme for Yahoo that has been the bane of previous management teams."

Well, yes. Yahoo does many things, and is first at few if any of them. Its share of search is 12.2 per cent and falling, according to research firm ComScore. (Google has two-thirds of the market.) While millions still use Yahoo e-mail services, more use Google's Gmail. Yahoo offers content aggregation, but so does … well, you get the picture.

The financials? Third-quarter revenue of just over $1.2-billion (U.S.) was slightly below the level of 2011's third quarter. Operating income of $176.9-million was up only marginally.

A growth company, Yahoo is not. But it's not worthless either – as recent valuations suggested.

Let's look at some of its more attractive parts. Yahoo owns about 20 per cent of Chinese search company Alibaba Group Holding Limited and 35 per cent of Yahoo Japan. According to accounting rules, neither adds to Yahoo's revenues, but the company does record a share of their profits.

Thanks to a sale of half its past Alibaba stake, Yahoo now has no debt and $8.4-billion in cash, $3.65-billion of which Ms. Mayer says will be returned to shareholders, largely through share repurchases.

Herman Leung of Susquehanna Financial Group values the cash at $5.80 per share, net of taxes, and the two Asian equity holdings at $9.37 per share. The sum of the two is just over $15, which is where Yahoo traded for much of the summer, even after Ms. Mayer's appointment. "Our downside scenario of $15 would essentially value the core at zero," Mr. Leung says.

Shares pushed $17 Tuesday, reflecting the view that there's now some value there. Mr. Leung upgraded Yahoo to "positive" from "neutral" Tuesday and raised his price target to $20. That values Yahoo's core business at 3.5 times his estimate of its 2013 EBITDA, or earnings before interest, taxes, depreciation and amortization. This, he notes, is "in line with AOL and newspaper companies. We think the assets at Yahoo should be worth a premium, given its reach, audience and underlying brand value."

Goldman Sachs's Heath Terry, who has an "attractive" rating on the shares, derives his price target of $22 by placing a multiple of six times EBITDA on the core business, and placing that on top of the value of the cash and Asian investments.

"With over $14 a share in cash and assets, an operating business generating over $800-million annually in free cash flow, the beginnings of a focused corporate strategy, and at least $3-billion in open market stock repurchases as a catalyst, we believe Yahoo represents a compelling risk/reward for investors," he says.

It seems a good place for Yahoo, and its investors, to be. Ms. Mayer doesn't have to return Yahoo to past glory to drive the shares upward. She just has to do enough right to demonstrate Yahoo isn't a big zero. I'd bet on that.