Yahoo – Irrelevant pandemonium.
The mess of the Verizon sale is almost irrelevant when valuing Yahoo.
• It is becoming clear that Yahoo got such a good price from Verizon, that the telecom company is starting to think twice about what it is getting into with Yahoo’s core business.
• Fortunately, the rally in Alibaba keeps the sum of the parts on Yahoo looking attractive even if the value of the core business ends up being zero.
• A string of misfortunes has come to light that raise the question whether Yahoo’s remarkable resilience in the fixed Internet is now becoming badly unstuck.
o First. The 2014 hack.
o 500m user accounts were compromised during 2014 and that Yahoo claims to have only learned of the data loss recently.
o This strongly indicates that Yahoo’s internal systems have been neglected in recent times and that management has been inattentive in its custodianship of user data.
o This is hugely damaging for Yahoo’s reputation as a trusted email service.
o Second: NSA and FBI Scanning.
o It appears that Yahoo built software that allowed the NSA and FBI almost unfettered access to user emails.
o This was despite protestations to the opposite from Marissa Meyer and coincided with its head of security leaving to join Facebook.
o In our opinion this puts Yahoo way behind Google and Apple when it comes to looking after user data.
o Third: Congressional ban.
o A recent increase in phishing attacks on congress email accounts via Gmail, Yahoo Mail and other web based email services resulted in a block for Yahoo Mail being put in place by congress.
o We understand that only Yahoo Mail has been blocked as it is considered by congress to have inadequate systems in place to protect the computers of congress members becoming compromised.
o The fact that only Yahoo Mail has been blocked is a further indication of the inadequate level of security that the service has in place.
o Fourth: High profile Yahoo employees don’t use it.
o Yahoo’s global anchor for its news service, Katie Couric, appears to prefer Gmail to Yahoo Mail.
o Katie Couric was hired 2013 at great expense to be a poster child for Yahoo to increase user engagement with its news service and other media properties.
o The fact that even Yahoo’s highest profile employees don’t seem to want to use its services sends a strong and negative signal about which service is better.
o Fifth. Email forwarding disabled.
o When a user switches to a new email account it is very useful to leave the old one on auto forward to catch emails from those that do not have the new address.
o In what appears to be a desperate attempt to prevent users from leaving the service, Yahoo has disabled automatic email forwarding.
o Yahoo has stated that the service has been disabled while features are being developed with the promise to get it up and running as soon as possible.
o Whatever the real situation is, the timing of the “feature development” is very handy for Yahoo.
• For the last 10 years Yahoo has neglected its Internet assets but has still managed to enjoy high usage and engagement in the fixed Internet despite its failure in mobile.
• It is this engagement that Verizon is paying $4.8bn for.
• However, recent events have given users the perfect excuse to finally close their Yahoo email account and move to something else.
• We have long believed that Yahoo Mail is the service that generates most of the usage and should users leave Yahoo, then the price that Verizon is paying for these assets will be brought even more into question.
• Yahoo’s actions lead me to worry that users have finally had enough and that the long standing engagement that it has had on fixed is finally starting to wane.
• The good news for Yahoo is that while the focus has been on the sale of the core business to Verizon the value of its stake in Alibaba has increased to $38.7bn from $29.7bn in June this year.
• If we redo our sum of the parts calculation (see here) valuing the core business at zero (assuming Verizon walks away) we arrive at a valuation of $53.8bn for Yahoo. (Alibaba + net cash + Yahoo Japan + patents).
• This equates to a fair value for the shares of $56.7 per share some 33% above where the shares now trade.
• Long suffering Yahoo shareholders can least draw comfort from the fact that if the core business sale fails or is discounted, it is almost an irrelevance to their investment.
• However, they should thank Alibaba as it is the saviour of what little credibility Yahoo has left
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