“Do You Yahoo!?” (Still?)

In this week’s Goldman Guide we discussed the rough start to September for the small cap benchmark, the Russell 2000.

We thought we would add our two cents to the one of the big topics of the week.

The chart below is the 10-year price picture for Yahoo!, Inc. (NASDAQ – YHOO - $42.55), where it is important to note that the stock is at an 8-year high!

10-Year Stock Price for YHOO

(Source: Yahoo! Finance)

The real question for traders and investors is YHOO on the verge of becoming another Microsoft (NASDAQ – MSFT)? For those of you living under a rock, this is the big week for the Alibaba IPO, which some analysts predict will open as high as $68. Yahoo has nearly a 23% stake in the Alibaba and has already benefited a great deal from all the buzz over the big IPO. The question is what does this mean for the future after this big bump?

Looking at our standard simple growth and P/E metrics it looks like YHOO is entering the overvalued arena with a trailing P/E of 35 versus a forward P/E of 32 and a 5-year PEG ratio of 2.8. This is contradictory to the technical analysis which indicates a very bullish picture from a short to long term EMA. The gross and operating margins of 0.72 and 0.07 respectively are comfortably above industry averages of 0.58 and 0.03 respectively, which also a positive for Yahoo!.

Yahoo!, Inc still has over $1.1 billion in cash as of the end of 2Q14. Where does the Company turn for new ideas for growth and use this cash? This is the huge question going forward and one we really cannot answer either. We think YHOO is not going anywhere if you are in for the long haul because of its existing product line. However, it may be time to take some profit if you have made a bunch on this trade and are looking to move the money somewhere else. Options also offer a great opportunity to take some profits. YHOO probably ends the year still right around $40.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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