Verizon Communications (NYSE: VZ) made a surprisingly shrewd investment when it bought the remains of internet relic Yahoo (NASDAQ: YHOO) for $4.8 billion. The telecom will get a very good return on the money it laid out for Yahoo’s internet operations.
The numbers in Yahoo’s latest earnings report; that for June 30, 2016, show that Verizon has gotten a very good deal. Here are some of the bargains that Verizon got for its $4.8 billion investment in Yahoo:
- $44.21 billion in assets.
- $6.381 billion in cash and short term investments.
- $1.022 billion in cash from operations.
- An enterprise value of $31.61 billion.
Verizon Made a Good Investment in Yahoo
Verizon will make money if it simply sells off Yahoo’s assets or operates advertising and sports website businesses. Even the Yahoo! brand itself is worth a lot of money given its history and reputation.
Yahoo’s headquarters campus in Sunnyvale, California, might be worth $500 million, realtor Mark Ritchie told The Los Angeles Times. The campus gives Verizon one million square feet of prime Silicon Valley real estate at the height of a tech boom. That means Verizon would recoup around one ninth of its investment by simply selling off Yahoo’s real estate.
Even more valuable is Yahoo’s online real estate; including all the ad space it controls at choice websites. Yahoo generated $3.28 billion from digital ads in 2015, even though it controlled just 2.1% of the market, eMarketer estimated. Although Yahoo’s digital ad market share is expected to fall to 1.5% this year, it will still generate $2.83 billion from those ads, eMareketer forecast.
A more valuable piece of digital real estate is Yahoo’s mobile ad business. eMarketer estimated that Yahoo’s mobile ad business will grow by 24.5% this year and generate $1.31 billion in revenue.
The Sickness at Yahoo
There are some potential revenues at Yahoo! Verizon can tap. It might take some time to money from them, because Yahoo is still a very sick company. The search engine pioneer reported a net income of -$4.898 billion and a profit margin of -33.64% on June 30, 2016.
That means there is a lot of dead wood at Yahoo which will have to be disposed of to make it a viable subsidiary for Verizon. To make it profitable Yahoo’s digital ad business will have to be streamlined and modernized.
One way to do that might be to transform Yahoo into an advertising only company. Simply run it as a digital-advertising platform and forget the other businesses. Despite that Yahoo might be the sort of company Verizon needs.
Why Verizon Needs Yahoo!!
The reason Verizon was willing to buy Yahoo is made obvious by the Telecom’s last earnings report its revenues are falling.
Verizon reported $130.81 billion in revenues in March 2016, and $130.12 billion in revenue in June 2016. That means the revenues fell by $1.69 billion over the course of a single quarter.
The telecom needs new streams of revenue to make up for what’s being lost. That makes the Yahoo acquisition a very sensible strategic move. It also shows us that Verizon is a very good value investment because it is making a lot of money.
Verizon is making a Lot of Money
The numbers in the earnings report show us that Verizon is a great value investment because it is making a lot of money.
The highlights of Verizon’s June 30, 2016 earnings report include:
- Revenues of $130.12 billion.
- A net income $14.44 billion.
- A profit margin of 2.3%.
- A free cash flow of $1.374 billion.
- Cash and short term investments of $2.857 billion.
- $32.85 billion in cash from operations.
- Assets of $231.87 billion.
- An enterprise value of $323.87 billion.
This makes Verizon a great value investment because it is generating a lot of float from its businesses. Any company that can generate that much cash from its current operations should be able to do the same with Yahoo’s assets.
To add icing to the cake, Verizon is currently undervalued; it had a market capitalization of $223.1 billion and a share price of $54.73 on July 28, 2016. If I were looking for a telecom to ad to a portfolio Verizon would be it.
Verizon belongs in your portfolio because it is a great income stock. Its shareholders were rewarded with a dividend yield of 4.13% and a return on equity of 91.55%. If you want to add both growth and income to your portfolio, Verizon is a great choice.