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Yahoo Is Undervalued

Although we're lowering our fair value estimate after another disappointing quarter, Yahoo's massive reach and the value of its Alibaba stake hold appeal, writes Morningstar’s Rick Summer.

Investors are playing a tiring waiting game, and another quarter of disappointing results from

In spite of the challenging financial results in the company's core business, unlocking the value of the investment in Alibaba remains the overwhelming factor in our investment thesis.

Total revenues excluding traffic acquisition costs, or TAC, declined 8% relative to 2014, the worst top-line decline since Mayer took over as CEO. A 13% decline in search revenues was the primary cause of the weak results, which management blamed on increased TAC and investments in its new advertising platform, Gemini. We believe the company will be able to stabilize the results in the company's core business, but we remain skeptical that a turnaround will be successful or likely.

On the expense side, the company has shown reasonable discipline, with improved expense leverage in the product development, sales and marketing, and general and administrative line items. We expect the company to continue to focus on better cost discipline, an area where we believe there is ample room to improve.

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About the Author

Rick Summer

Strategist

Rick Summer, CFA, CPA, is a technology strategist for Morningstar, responsible for Internet and technology research. Before assuming his current position in 2014, he was a senior equity analyst. He joined Morningstar in 2005 as an equity analyst, covering software and Internet companies. He has operating experience in the wireless and software infrastructure industries and has worked as a private equity investor for UBS Global Asset Management.

Summer holds a bachelor’s degree in business administration from Emory University and a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant (CPA).

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