Yahoo! Inc. (NASDAQ:YHOO) shares are outperforming a dull market today. The internet information provider's shares are up more than 2% as we type thanks to an upgrade from Piper Jaffray.
Analysts, Gene Munster and Douglas Clinton upped their opinion on Yahoo! to an "Overweight" recommendation from "Neutral" with a fresh new price target of $43 versus the previous target of $37 – upside potential to target of 22.68% as we type.
Like you don't know… with 12,200 employees, Yahoo! Inc. (Yahoo!) is a global technology company. Yahoo! delivers digital content and experiences, across devices and globally. The company earns nearly 80% of its revenues from advertising.
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In justifying their change of heart, Munster and Clinton argued, "We expect that as we get nearer an Alibaba IPO, a more realistic valuation should be reflected in YHOO. While we continue to view the company's core business as challenged and expect it to continue to grow below industry rates over the next 2+ years, we believe that Alibaba could more than make up for the challenges at the core."
The pair thinks Alibaba should add up to $6 to YHOO's shares price as Alibaba would be valued at roughly $214 billion using the peer EBITDA valuation.
Let's see if $43, including the $6 Alibaba premium, is possible based on 2015 sales and earnings estimates.
At the moment, Wall Street forecasts 2015's top line to be $4.64 billion, generating earnings-per-share (EPS) of $1.81. Since 2009, Yahoo traded with an average price-to-sales ratio (P/S) of 4.67. Based on the current consensus, the average P/S generates a price target of $21.45 – add in $6 and we get $27.45.
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To hit $37, plus $6 to get to $43, Yahoo needs to trade at eight times 2015's projected sales. That's high, but not as high as the half-decade peak of 9.47.
On the bottom line, the most trafficked website's average price-to-earnings (P/E) ratio since October 2009 was 27.65 with a median of 19.02 (mid-point). At the typical P/E, Yahoo prices out at $50.05, no need for an Alibaba premium. Using the mid-point and 2015's EPS consensus, YHOO would be valued at $34.42, add in $6 and we get to a touch over $40.
Overall: it could be difficult for Yahoo! Inc. (NASDAQ:YHOO) to hit Piper Jaffray's $43, even with a $6 Alibaba premium, based on recent P/S history. However, $43 is slightly above the mid-point range and below the average P/E for the past five-years. Forty-bucks seems like a fairer target to iStock.
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