Worth Chipping Away At: Good Risk-Reward Bet
Buying Yahoo’s (YHOO) stock is a bet on Project Panama, its new advertising platform. If it succeeds, the stock goes up. If it fails, Terry Semel gets fired and the stock goes up. Therefore, investors are almost in a win-win situation.
In addition, the downside risk is protected by the powerful cash flow machine that this company is. For 2006, Yahoo generated revenue of $6.4 billion, EBITDA of $1.9 billion and free cash flow of $1.27 billion. Any way you look at it, Yahoo’s cash generating ability is not going away over night.
For the stock to take off, Project Panama needs to be able to better dynamically link search with advertisers, thereby driving growth again. However, investors will not see this growth until 2Q07. Yahoo stated that 1Q07 will be a transition period.
Waiting for Project Panama to show positive results could prove to be a big risk. If the new advertising platform takes hold the stock might have already discounted the success, making it too late to profit. With little downside risk, Yahoo is worth purchasing and putting away. If the new advertising platform begins to work, this stock will quickly come back into favor.
January 24, 2007
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