The markets continued to try to gain back its land legs with modest advances on Tuesday. After the markets closed in the US, Turkey announced a doubling of its interest rates, sending the Turkish Lira higher and putting a bid into US equity index futures. However, the advance in futures dissipated overnight and turned to red by the pre-market hours. More on that later.
Yesterday, I had a very busy day which seemed to pick up steam as the day progressed. After market hours, I watched the Yahoo (YHOO) quarterly earnings broadcast. The company reported better than expected results on the bottom line but came in about as expected on the top line. Revenues ex-TAC (traffic acquisition costs) declined 1% for the full year. Display ad revenues declined 9% for the full year. I would have expected some discussion about Yahoo’s holdings in Alibaba. Instead, management droned on for close to an hour on Yahoo metrics most of which was spent discussing Tumblr. You might wonder what Tumblr is, so I will tell you. It is Yahoo’s blog aggregator. CEO Marissa Mayer spent all too much time telling investors about the recent traffic that Tumblr’s tech and food sites have attained. I could care less and I am sure that other investors and analysts share my sentiment. Yet nothing about Alibaba, other than a line item in the earnings release for earnings in equity interests (which includes both Yahoo’s 24% stake in Alibaba and its 35% in Yahoo Japan) and a page in its investor presentation. There is concern that the growth rate in Alibaba is slowing (it only grew revenue by 51% and gross profit by 58% in 2013). However, the key to investing in Yahoo is the ability for Alibaba to obtain as high a market cap as possible when that company goes public, as I expect it will in 2014. Currently Yahoo has a total market capitalization of about $38 billion. If Alibaba sells for as little as a $50 billion market cap, then Yahoo’s stake in the company would be worth $12 billion. Most analysts opine that Alibaba is worth much more than that, but let’s assume a conservative valuation. Yahoo Japan has a market cap of $33 billion, putting Yahoo’s stake at $11.6 billion, according to my calculations. All told, in the company’s presentation, YHOO is assuming the market values of those companies at $19.4 billion. I am valuing it closer to $25 billion. So, when you back out the minority interest holdings, Yahoo itself is quite cheap. The problem is that Mayer needs to focus on that monetization rather than diddle over Tumblr. My investment strategy is to hold Yahoo as the sum of the parts is greater than its current price.
So after a wasted hour listening to the Yahoo crowd, I spent two productive hours teaching a class on financial derivatives in the evening, only to return home to microwave some dinner and waste another hour and a half of my life listening to the State of the Union Address. Luckily, I got to cap off the day with a nice glass of single malt with my buddy Dan as we discussed the Super Bowl (he is from Denver) and the pacer that we just bought.
Today is going to be an interesting day. As I mentioned above, futures have done an about face in the last few hours and are looking lower. In part I think it is due to a lack of specific growth oriented proposals in the President’s speech. In part, it is earnings related profit taking. For example, Boeing (BA) reported excellent earnings but is off nearly 4% in the pre-market on soft guidance. It is another case of under promise and over deliver if you ask me. Lastly, and most important, are some jitters ahead of today’s Federal Open Market Committee (FOMC) press release and news conference. I expect to have some interestinng discussion on the FOMC today on Scutify. Ben Bernanke will lead his last FOMC meeting and expectations are that the monetary authority will further diminish its asset purchase program by another $10 billion per month. I am not so sure. Given what is happening in the emerging markets, the FOMC, which also has advance information of fourth quarter GDP and January payrolls, might defer any further change in policy until its March meeting. Thus, let’s expect some early weakness, followed perhaps by some firming up right before the FOMC announcement to be topped off by post-announcement volatility.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long BA and YHOO — although positions can change at any time.
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