Phil:
I'm a pretty clever guy, but I can't be this smart. You see, I LOVE Yahoo. Have used it for years, love what they are doing, think their CEO is awesome. I also think that along with Google, they are in a class of their own. But surely everyone must be as aware of this as I am, no? I ran the numbers, and if I did so correctly, I have found a business that has meaning to me, a moat, great management; and a stock is priced so attractively it makes me nervous.
- TTM EPS: 1.24
- Rule 1 Growth Rate: 25%
- Future PE: 50
- Future EPS: 12
- Future Price: $577
- Sticker: $143
- MOS: $71
The stock is trading in the area of $30. Surely I must have made a mistake – how could this good of a deal exist?? The analysts are looking at a future PE of 57! I’ve gone with 50. But even going as ridiculously low as 20 (the industry’s future PE estimates) I still come in with an MOS of around $30. Perhaps you can channel another Phil – Dr. Phil – and talk me through this. Have I made a horrible assumption along the way, or is this a Rule #1 gem?
Here's what I told him (about a week ago):
Ian,
I'd like you to go throught YHOO step by step with the 4Ms for me and I'll post it. No rush, but I think you've asked an important question about an important business.
Yahoo by all reasonable expectations looks way undervalued as you indicate. But if we were going to buy the whole thing as our only business for our family's financial future, what should we expect for the future and (and here is the question) how predictable is that future?
The key to great investing is to not invest when you don't have a high degree of certainty about the outcome of the investment. Let's take a real estate example: I have a home in Jackson Hole. 97% of the county is restricted from development and can never be built on. There is only one parcel of acreage left in the whole valley that can be developed with any density. Ever. That means that if you want a place here you are going to have to buy an existing home. And those are limited. Right now there are only 250 homes for sale in the entire valley in a market that typically turns over 1000 homes a year. In addition, Jackson Hole is one of the most desireable places to live in America.
Question: Do you think my home is going to go up in value over the next twenty years? I think so. In fact, I have a high degree of certainty about it. Short of some catastrophe, this home is going to be worth a lot more in twenty years than it is today. That's the kind of certainty I want to have when I buy a business.Never think in terms of stock. Always think in terms of buying a business and think in terms of your degree of certainty that this business is going to be worth a lot more in twenty years than it is worth right now. And remember that this is our retirement we're talking about here -- so don't make any close calls. If it's close, it's too close. It has to be obvious to you like this home appreciation is obvious to me.So here's the thing to look at at YHOO: Can you get to that level of certainty about their next twenty years? If you think so, make the case in a 4M analysis and focus on the Moat part of the analysis. I'm with you on management, meaning and MOS. So this business, as an investment, lives or dies on Moat.Now go play,Phil
Here's the rest of Ian's homework:
Phil: Let's talk Yahoo (Y!). Specifically, let's walk through the 4Ms . . .
Meaning: I have used Y! in some form or another virtually since its inception. That's saying a lot considering how many internet companies have come and gone. Y! is an integral part of my daily life (in fact I have the RSS feed from your blog on my My Yahoo home page). On a daily basis Y! helps me stay informed about the world, keep up-to-date on my interests, and stay in touch with my loved ones. If Y! disappeared tomorrow I would have some serious retooling to do. Based on what I know about you (and even despite your admiration of Google) I doubt you need much convincing on the meaning Y! has to many people in this world.
Management: Terry Semel. The guy is a winner (Yang and Filo aren't shabby either). I've known about him from his days at Warners Bros. Frankly I was surprised when he took the helm. But he has made the right moves. In the vast expanse of the Internet, Semel figured out how to make Y! the most valuable destination (yes folks, even more so than Google). And I've always loved managers who already have more money than God, yet continue to grind out 15 hour days in the pursuit of victory. And what's more (I admit an old PR stunt, but still a good sign) Semel just cut his salary to $1.Moat: Ok, this is where it might get tricky. First let's look at the qualitative. For Y! its all about a GREAT brand. But we can't ignore 2 things. First of all, Google and Microsoft are both very scary and very intent on winning (however the heck you define that). Second, the Internet is still in its nascent stages. No one knows what the internet is going to be in 10 or 20 years from now (so the argument might go that how can anyone predict if Y! or Google for that matter will be relevant in 20 years). But I can tell you for 100% sure that the internet will exist in some form or another (but will likely resemble something totally different than what it is now). And I could also argue that the truly great companies GE for example evolve and grown with the times, to meet the evolving needs of the population. So I would say that as long as Y! employs visionary executives, I dont see why they can't be leaders for generations to come.
Ok, now the quantitative . . . [Click to see larger image.]
Ok, some interesting things to note. 1 year Equity has taken a dip, but is still way over 10%. EPS and sales figures are off the charts! Cash flow is a bit unpredictable, and to be honest I haven't dug into the unpredictability yet. But on the whole and even with a few outstanding questions its pretty ripe. So were well on our way to satisfying 3 Ms.
Now let's go to MOS heres where I get a little spooked . . .
- TTM EPS: 1.24
- Rule 1 Growth Rate: 25% (pretty conservative all things considered)
- Future PE: 50 (the analysts are using 57! I've gone lower. But even if I use a future PE of 20 I still get an MOS of $30, which is what the stock is currently trading at)
- Future EPS: 12
- Future Price: $577
- Sticker: $143
- MOS: $71
The stock is trading around $30 a HUGE MOS. In fact so big that as I said above, I'm spooked. I can't be the only person looking at Y! Maybe you can give us your take on the company and help me understand why Im nervous to pull the trigger.
My response:
First, you did a very honest analysis. That's the first great step to deciding what to do next.
Second, you nailed the Meaning and the Management. YHOO is solid in both cases.
Next you determined that the Moat is the issue, as it is. You determined that it has a Brand Moat (and the numbers to prove it) and by implication you also determined it has a Switch Moat since taking yourself off of Yahoo! and going to Google would involved a lot of hassle to you and many others.
Certainly you are right that a great business in a nascent industry will ride the changes, and YHOO may just do that. Still, as you pointed out, it would be very difficult to predict that YHOO is going to be around for sure in 20 years. To me that means that this case is not black and white. The answer that this is the right investment is NOT jumping out at us. And when it doesn't jump out and make itself OBVIOUS then it's too close to call. Which means by Rule #1 we can't invest.
Except for the Risky Biz portfolio, of course, which is where I go when I just lust to own this business but it isn't obvious what the future holds for it.Job well done.Now go play.
Phil
