Yahoo
Narrow-moat Yahoo (YHOO) reported second-quarter results at the low end of its guidance, but investor focus remains on the sale of the core Internet business, and the firm did not provide any updates on the state of the bidding process.
Ultimately, we believe the company’s strategy is to sell its core business and become a shell company or a tracking stock representing the interest it has in Alibaba and Yahoo Japan. We have slightly increased the probability of a successful tax-efficient approach of realizing the value of those two holdings. The shares remain fairly valued, in our opinion.
Yahoo reported net revenue of $1 billion, at the low end of management’s guidance, down 19% year over year. While part of the decline was due to Yahoo no longer receiving IP fees from Alibaba, net revenue showed weakness in search and in display, which declined 24% and 3%, respectively, versus the year-ago period.
Although the significant cuts we are seeing in operating expenses may improve operating efficiency for now, we believe these measures are also likely to hurt the firm’s competitive position in the long run. In addition, while Yahoo has a healthy balance sheet today, we anticipate future operating losses. These could make it difficult for the firm to attract additional capital to make any large acquisitions that might help it recover some of the lost ground.
Netflix
Netflix (NFLX) posted disappointing second-quarter subscriber adds in both the international and U.S. segments in part because of the price increases to older accounts. The company also issued weak subscriber guidance for the third quarter and management expects some continued impact from preferential treatment to older existing customers and from the Olympics.
Revenue and adjusted operating income were in line with our expectations. Even with the lower add numbers, Netflix continues to expand its streaming base, ending the quarter with more than 79.9 million global paid subscribers, up from 62.7 million a year ago. We retain our narrow moat rating and our $69 fair value estimate.
Another trend to watch is the impact of competitors on growth, especially as Internet TV continues to evolve, with Hulu and other virtual pay-TV distributors expanding their offerings. Management remains sanguine about the impact of the more competitive marketplace, claiming that Internet TV is taking time away from linear viewing.
IBM
IBM’s (IBM) second-quarter fiscal 2016 results largely reflected the firm’s continued push into growth markets associated with “strategic imperatives”; analytics, cloud, mobile, security, and social related work.
On a trailing 12-month basis, strategic imperatives accounted for 38% of IBM’s revenue, or $30.7 billion, ahead of the firm’s expected run rate. We think IBM will continue to push its strategic imperative agenda, utilising mergers and acquisitions to achieve its medium-term strategic imperative revenue target of $40 billion by fiscal 2018.
On the core, or legacy, side of the business, IBM’s revenue performance was largely in line with our flat-to-down expectations, signalling no overall change to the business' trajectory or our view of it. Brexit commentary was notably absent during management’s call, and the company does not believe it will have any material impact on its fiscal year.
As a result, the firm reiterated its full-year EPS outlook of at least $13.50. We are maintaining our $145 fair value estimate and narrow economic moat rating. With the stock up significantly over the past six months, we think investors should seek a wider margin of safety before investing in the company.
