The struggling Internet company may look like a basket case but now's the time to jump in.
SAN FRANCISCO (Fortune) -- Here's why you should buy, not bail, on Yahoo.
1. Eventually, management will get tossed.
Starting with the least scientific or analytical reason for owning Yahoo, there's every reason to believe the days are numbered for CEO Jerry Yang and President Susan Decker. By all accounts fine people, they simply haven't led Yahoo well.
The former excelled as Chief Yahoo, dabbling in deals and motivating the troops. But Yang hasn't been a decision leader and is "lurching from crisis to crisis," as The New York Times aptly phrased his tenure. Decker, in turn, is widely derided in Silicon Valley as too much the finance chief, not enough the operations guru.
Yahoo's doormat board tolerated Yang's ascension to CEO as a way of appearing to not have fired his predecessor, Terry Semel. Now that raider Carl Icahn - who has been quiet of late regarding Yahoo - is on the board, though, action is far more likely. Were the board to dump Yang and Decker it's an easy bet the stock would pop, even if they didn't immediately name a successor.
2. Microsoft will return.
Microsoft continues to deny that it's interested in bidding again for Yahoo. It is forced to make these protestations because Steve Ballmer can't seem to stop talking about why such a deal would make sense.
The math is pretty straightforward here. Microsoft offered to buy Yahoo for $31 per share. Yang thought his company shouldn't fetch a dime less than $37. Microsoft said it was willing to pay $33. Today, Yahoo has been nosing below $12. Microsoft, instead, has been talking about buying back more stock.
Just wait. Microsoft likely is waiting to see what the Justice Department has to say about Yahoo's search-advertising deal with Google. When that's all done, a Microsoft-Yahoo tie-up makes as much sense as ever, especially considering that Microsoft, amazingly, still can't make money in its online business. It needs Yahoo's scale to get profitable.
There is another Microsoft option that could benefit Yahoo and its stock price. "We believe Microsoft is waiting in the wings to replace Google as a search outsourcing partner," writes Marianne Wolk of Susquehanna Financial Group, "which could afford Yahoo some upside lift to [its] earnings forecasts, assuming there is a minimum guarantee from Microsoft to exceed Yahoo's internal figures as incentive to get the deal done."
That's a good thought: If Google can't help Yahoo make money, Microsoft will.
3. Investors are looking for reasons to buy this stock.
In the initial hours after Yahoo reported a generally atrocious third quarter and a bleak outlook Tuesday, its stock popped. The various reasons postulated by observers were amusing when taken as a whole. The San Francisco Chronicle guessed this was due to "relief that Yahoo's fourth-quarter financial guidance wasn't as bad as feared."
Others chalked it up to the cost reductions associated with announced layoffs of 10% of Yahoo's workforce - even though the layoffs were widely expected and therefore shouldn't have affected the stock price. One analyst, Mark Mahaney of Citigroup, praised Yahoo for having had the foresight to avoid stock buybacks until now - and then prognosticated the positive impact of future buybacks. "We note that the company ended [the third quarter] with about $3.3 billion in cash and no debt," he wrote, adding that buybacks were likely.
4. Long-term trends favor Yahoo.
Yes, Yahoo is losing share to Google. Yes, Yahoo is barely growing. Yes, it's a tired argument that Yahoo is one of the strongest brands in the media world. Yes, this argument for owning its stock hasn't worked in a long time. Yet the argument still holds water. The company global page views grew 17% in the third quarter. It's part of an industry, online advertising, that will continue to grow (or at least take share) no matter the economy. Compared with The New York Times, a sterling brand in a declining industry, Yahoo is a powerful brand in a growing industry.
5. It's cheap.
There's always that. Morgan Stanley's Mary Meeker figures that given the value of Yahoo's cash and its publicly traded Asian assets (even taking into account the difficulty in selling stakes in other companies), investors value Yahoo's core business at just $6 per share, or eight times Wall Street's estimates of 2009 profits. That's an extraordinarily low multiple for any company with the opportunities in front of it that Yahoo has. Yahoo's management thought Yahoo was cheap at $30, of course. Today, investors would do quite nicely for a fraction of that amount...