Nomura Securities Downgrades Yahoo! (YHOO) to Neutral; Speculation Priced In

Nomura Securities downgraded Yahoo! (NASDAQ: YHOO) from Buy to Neutral with a price target of $40.00.

Analyst Anthony DiClement commented, "Reports from The Wall Street Journal indicate that Yahoo’s board may be considering a sale of its core business. While the board has a fiduciary responsibility to evaluate any bids, and a sale (to private equity, in our view) is within the realm of possibility, this shift in strategy would involve a change to plans for the spinoff of Aabaco, perhaps indicating the possibility of increased uncertainty surrounding tax treatment of the spinoff. As such, we increased the discount we apply to the valuation of Yahoo’s stake in Alibaba. At the same time, the stock has increased on the news, diminishing upside to our target price. As such, we are moving our rating to Neutral, for three reasons:

• Yahoo valuation approaching our target. Our $40 TP is based on core Yahoo being worth 5x 2016E EBITDA; we now discount Yahoo’s stakes in BABA and Yahoo Japan by 40% and 35%, respectively. We believe that, given the cash-generative nature of core Yahoo ($500-600mn in 2016E FCF) and potential for cost rationalization, it is very possible that private equity firms would find value in Yahoo’s core business. However, upside to YHOO shares from a sale are very limited, as every 1x turn in core Yahoo EBITDA equates to less than $1 per share to YHOO.
• Question remain surrounding Alibaba-related tax liability. As we wrote on 9/8/15, it remains possible that the Aabaco spin incurs a hefty tax liability. The spin is planned for early January; even after the spin is executed, investors will not have certainty as to the ultimate tax incidence for three years. While a sale of core Yahoo could simplify this tax issue, the transaction’s timing and price would remain uncertain, and upside from a sale is currently being priced into the shares, in our view.
• We have diminishing certainty in forward EBITDA and FCF. Despite investment in growth areas, net revenue is likely to decline 8% YoY in 2015, and we model it flat over the next two years, as advertisers shift budgets away from desktop display. We forecast EBITDA and FCF to decline 8% in 2016, as the conclusion of TIPLA revenue is a $210mn drag to 2016’s bottom line. These factors, as well as additional expenses related to ongoing restructuring, are likely to compress 2016 EBITDA margins by a further 140bps in 2016 to 21%, following 2015’s 750bp decline.

For an analyst ratings summary and ratings history on Yahoo! click here. For more ratings news on Yahoo! click here.

Shares of Yahoo! closed at $33.71 yesterday.

You May Also Be Interested In

• HSBC Downgrades Iflytek Co Ltd (002230:CH) to Hold
• Ametek Inc. (AME) PT Raised to $290 at BNP Paribas Exane
• Clear Secure Inc (YOU) PT Lowered to $45 at DA Davidson