Yahoo Forecast: Yahoo Is Greatly Undervalued – An Algorithmic Analysis

Yahoo Forecast

Yahoo! (YHOO) has been in a transition since Marissa Mayer took over as CEO in 2012. The company’s display ads have been diminishing for some time, and while the company is doing its best to turn this trend around, it is focusing on four key markets to drive growth for the company in the future.These are mobile, video, native, and social, also known as MaVeNS.

The company’s focus on these areas can be seen in the company’s acquisitions over the past couple of years, such as Tumblr, Brightroll, and Flurry. Mayer’s attempt to transform the company from an ageing desktop platform to a mobile-first company is taking root, and she is banking on mobile to turn the company around. The mobile-first strategy already appears to be paying off, as the company reported $254 million in mobile revenue in its last earnings report, up 23% quarter-over-quarter. While Yahoo has refreshed a number of its apps, including Weather, Sports, and Games, to positive reviews, it now needs app developers to build on its platform.

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The company still needs to make up ground on the two biggest players in mobile, Facebook and Google. In order to do so, Yahoo is using Flurry, which it acquired last July for a reported $300 million. The analytics startup tells software developers how many people are using their apps and what they are doing. On February 19th, Mayer presented a new suite of tools for building, distributing, and making money from apps. New developments in Flurry make it easy for developers to gain insights into their app’s performance. With analytics and other insights driving improvement, there will be better apps that will lead to more traffic and ultimately more ad revenue.

While the company’s revenues have maintained relatively flat since Mayer took over, the company is actually in a better place. It is now positioned well in growing markets that will push Yahoo forward, instead of relying on legacy businesses that were going the other way. Meanwhile, it is greatly undervalued. Mayer announced that the company would spin off its remaining shares in Alibaba tax-free in its last earnings report, returning value to shareholders. Yahoo also still has a stake in Yahoo Japan.

The value from the ownership stakes in these companies, plus the $5.7 billion in cash the company has on its balance sheet, is worth more than Yahoo’s current market cap. This negative valuation of the company is hard to comprehend, especially when taking into account that Yahoo reported $1.1 billion in GAAP revenue for the full year of 2014 in its transformative investments, or MaVeNS, alone. Considering that these investments have massive room for growth and will be profitable next year and beyond, Yahoo’s price should clearly move higher.

Looking at it another way to emphasize how cheap the stock is valued right now, the remaining value of Yahoo’s stock when taking out the stakes in Alibaba and Yahoo Japan is roughly $2 billion. But the company is expected to make $1.2 billion in earnings before interest, taxes, depreciation, and amortization, a common indicator of a company’s financial performance. That means Yahoo’s EBITDA multiple is below 2. This is incredibly low for a tech company, as Facebook has a multiple of 33 and Google’s is 15.

Algorithmic Forecast For Yahoo Over Past Year

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The algorithm has more data to forecast within the long term and, naturally, outputs a more accurate predication in that time frame. Having said that, intraday traders, along with short-term players, will also benefit by taking the algorithmic perspective into consideration.

The I Know First algorithm was able to correctly predict the behavior of Yahoo’s stock for the last year. Figure 1 is an I Know First algorithm prediction made on March 2nd, 2014. The self-learning algorithm uses artificial inelegance, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

In this forecast, Yahoo had a signal strength of 1.27 and a predictability indicator of 0.32 for the one-year time horizon. In accordance with the algorithm’s prediction, the stock price increased 14.07% over that time.

forecastFigure 1 

Algorithmic Forecast For 2015

Having demonstrated how I Know First’s algorithm was able to correctly predict the movement of Yahoo’s stock price earlier in the article, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. Figure 2 includes the three-month and one-year forecasts for Yahoo from March 5th, 2015. In both forecasts, Yahoo has a positive signal, indicating the algorithm is bullish for the stock.

forecast 2Figure 2: 3-Month and 1-Year Forecast Updated March 5th, 2015

The positive signal strengths go in line with the current outlook for Yahoo. Investors are getting a steep discount on a tech company that is successfully transitioning its core business to mobile, which has plenty of room for growth in the future. Dips in the stock price provide huge growth potential to investors, as Mayer has set Yahoo down a profitable path that will only grow more successful in the future.