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Momentum

Yahoo! Inc. (YHOO - Analyst Report) has delivered 7 straight positive earnings surprises with an average beat of almost 31.6%. Shares of this Zacks #1 Rank (Strong Buy) gained significant momentum following its third quarter results from late October, which including a positive surprise of nearly 50%.

Yahoo’s divestiture of approximately half its stake in Alibaba has reinstated investor confidence in the new management’s ability to execute its long-term strategy, which remains focused on improving the core business. Yahoo shares have climbed 23.3% in the past 12 months.

Impressive Third Quarter

Yahoo’s third quarter results from October 22 included earnings per share of 35 cents, which improved 31.2% sequentially and 81.0% year over year. The result was also 45.8% better than the Zacks Consensus Estimate. Yahoo’s non-GAAP (excluding TAC costs) revenue was essentially flat on a sequential basis but increased 1.6% from the year-ago quarter to $1.09 billion.

Yahoo generated a gross margin of 67.1% in the quarter, up 126 basis points (“bps”) sequentially and down 130 bps year over year. Total operating expenses of $629.9 million were up 1.9% from the previous quarter and 7.8% from the year-ago quarter. Product development costs were up as a percentage of sales, partially offset by higher cost of sales, with both selling & marketing and general and administrative (G&A) costs staying consistent.

However, product development and selling & marketing declined significantly on a year-over-year basis, partially offset by increased other costs. The net result was an operating margin of 14.7%, which declined 38 basis points (bps) sequentially and increased 241 bps from the year-ago quarter.

Earnings Estimates Moving Up

The Zacks Consensus Estimate for 2012 increased 1% to $1.07 over the last 60 days as 7 of 8 estimates were raised. Meanwhile, the Zacks Consensus Estimate for 2013 climbed 1.8% to $1.12 over the same timeframe.

Reasonable Valuation

Currently, Yahoo is trading at a premium on both a price-to-earnings (P/E) and price-to-sales (P/S) basis. Its P/E multiple of 18.2 is slightly higher than the industry average of 17.9. Similarly, Yahoo’s P/S multiple of 4.6 is just ahead of the industry multiple of 4.2.

On the other hand, Yahoo’s price-to-book (P/B) multiple of 1.5 is significantly lower than the industry average of 4.2. Moreover, Yahoo’s PEG ratio of just 1.28 (industry 1.51) indicates that the stock is reasonably valued given the expected growth rate of 14.0%. Notably, Yahoo’s return on investment (ROI) is 9.9%, much better than the industry average of 5.0%.

The stock is currently trading above its 50 and 200 day moving averages of 19.08 and 16.60, respectively. Yahoo shares have also outperformed peers such as Google (GOOG), Facebook (FB) and Baidu (BIDU) over the last 12 months.

Yahoo! Inc. is a digital media company that delivers personalized digital content and experience to its users spread over 60 countries in 45 languages. Yahoo! generates the majority of its revenue through display and search advertisements. Advertisers are generally charged on a pay per click basis or on a per impression basis. Yahoo! was founded in 1994 and has a market capital of $23.54 billion.


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