Tag Team Analysis: YHOO

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Lindsey Bell:

Yahoo! (YHOO) earnings were released last night and while GAAP EPS of $0.35 was well ahead of what the street was looking for, revenues were below estimates given disappointing display ads sales.

This report made it clear that YHOO's core business is taking a while to turn around. This is the second quarter display ads declined more than anticipated. Partially offsetting this was a search revenue increase of 6.5% ex-TAC (traffic acquisition costs – the way analysts measure results). This was the third quarter CEO Marissa Mayer was at the helm and she even admitted that this turnaround would "take several years." Mayer outlined a strategy with the results that focuses on mobile, personalization, and the re-imaging of its search and display business. She stopped short of providing a detailed product roadmap.

The Wall Street Journal pointed out this morning that ad spending by many customers is the same or lower at YHOO this year. Part of the reason for that is they don't understand what the company's ultimate vision is.

Guidance for the second quarter was below consensus on weaker than expected margins, yet FY13 guidance was maintained. That suggests the company will have to make up that margin deterioration in the second half of the year, which creats a risk to the shares. The stock initially fell 4.5% after-hours last night. It has since stabilized a bit, opening down 1.5%. That was in part due to an upgrade to a Buy rating (from Neutral) at Bank of America / Merrill Lynch.

The call at BofA was based on the incremental valuation potential at Alibaba. The value in these Japanese assets continues to appreciate (and drove the earnings beat). Today the stock still only 7% off its 52-week high. With the stock trading at prices not seen since 2008 and a core business that is at best muddling along, I recommend staying clear of this stock here.

Bob Lang:

I took a play a short term play on YHOO ahead of the report.

My trade: Buy to open April 23 calls at $1.12 (these expire Friday so I'm looking for a good move here prior).

Why I made the trade: Implied volatility was low ahead of the report, especially considering the earnings were likely to cause a big price move. Recent option volume trends have been bullish and are showing this today as well. The chart and explanation of the technicals are attached. Last time around they beat handily but had an exhaustion run and lost it. The new CEO is poised for big things and this being her third quarter at the helm I had expected they would have some good results to post after years of sideways to down, losing share to Google (GOOG) and others. She seems to be building value for a powerful brand. There were some doubters in yesterday's selloff but the clue today is how it held the low from Monday....28 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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