Bob Peck Maintains Buy On Yahoo 'Despite Weakening Fundamentals'

In a report published Wednesday, SunTrust Robinson Humphrey analyst Robert S. Peck maintained a Buy rating and price target of $50 on Yahoo! Inc. YHOO. Although the company's fundamentals appear to be weakening, the rating has been maintained due to the value of the investments in Alibaba Group Holding Ltd. BABA and YAHOO JAPAN CORP. YAHOY. "The pending IRS decision remains the largest driver of the stock," analyst Peck said, while adding that there were, however, various points to note regarding the company's core performance in 2Q. Revenue growth for the quarter, excluding TAC adjusted for non-traffic items, came in at -2 percent, with organic revenue being even lower and "Other" revenue growth at -2 percent, year on year. Core EBITDA came in at a decline of 50 percent year on year from the 2Q14 level, which in turn was a 50 percent decline from the 2Q13 level. While FCF was negative during the quarter, the company did not undertake any share buybacks, despite the pull back in the share price. The company has issured its 3Q15 revenue and EBITDA guidance 5 percent and 20 percent below the consensus forecasts, respectively, due to increased investment in mobile search, along with lower margin distribution deals. "Further, in 4Q, the TIPLA deal ends ($60M impact to revenue and EBITDA), and Yahoo Small Business could be spun-off," analyst Peck stated. "While Yahoo's core business was challenged three years ago, after $6B of investment, revenues and EBITDA continue to decline. As we get closer to Alibaba spin and potential YJ rationalization, we believe investors will shift their attention to the performance of the Core," the SunTrust report added.