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In the last few months, Verizon VZ has shown a lot of interest in the prospect of owning Yahoo YHOO. Executives of the telecom provider have been talking up the idea of owning Yahoo for a few months now.
In recent history, Verizon has been growing more Internet-oriented as it moves forward. One move that shows Verizon’s dedication towards making this transition is the fact that it bought AOL last year for $4.4 billion.
Verizon is very interested in the opportunity to own Yahoo because it wants to compete with Facebook FB and Google GOOGL in the lucrative online advertising market. With AOL and Yahoo, Verizon would have two large internet companies at its disposal, bolstering its bid to secure a place as one of the elite digital advertising platforms. Verizon believes that it can use quality consumer targeting to attract advertisers.
VZ is placing a bid because it wants something new to drive the company’s growth. Although Verizon’s industry is consolidated, it is still a competitive space where rivals like Sprint S are threatening to steal customers away with attractive pricing. Verizon’s largest segment is maturing, so if the company can shift some of its risk by having a top tier advertising platform, VZ shares should be better off as a result over the long run.
Google and Facebook are the biggest digital advertising platforms out there. If Verizon can actually combine customer data from smartphones with advertising inventory from AOL and Yahoo to create an elite advertising platform, then it will be an attractive buy. Can Verizon do this effectively enough to actually compete with the likes of Facebook and Google though?
It will be interesting to see what kind of a bid Verizon places on Yahoo. Some speculate that the bid will be between $6-$8 billion. There was a list of about 40 companies who seemed to be interested in purchasing Yahoo, but that number has dropped as the internet company placed an April 18th deadline to place a bid.
Google GOOGL, Comcast CMCSA, and AT&T T are among potential suitors who are no longer in the race to own Yahoo. Time Inc TIME also dropped out, and it chose to do so because it was too hard for it to properly value Yahoo’s business.
If Verizon actually manages to buy Yahoo, should you buy VZ stock?
No, you shouldn’t. There are so many questions with too few answers right now. For one, Verizon may have to exercise some leverage on the purchase, depending on how large its offer is. Verizon’s liabilities fund the vast majority of its assets, so a Yahoo acquisition might not be the best move for the company right now.
Why are so many large companies giving up on buying Yahoo? It is especially noteworthy that Google hasn’t showed any interest. Google doesn’t want to see a lot of competition in online advertising, so why wouldn’t it eliminate some potential competition by buying Yahoo outright?
For one, Yahoo has not been able to even maintain its sales and profits, let alone grow. Our EPS consensus for this year has diminished, going from an estimate of $0.23 90 days ago, to a current consensus of $0.18. Yahoo also missed our earnings consensus estimate by 60% when it reported its earnings last quarter. Many analysts predict significant earnings and revenues decline for this quarter. In 2015, Yahoo saw operating cash flows of -$2,383.42. This is very disconcerting for a company that has been trying to turn itself around for many years now.
Finally, the biggest question is: can Verizon actually hope to compete with the likes of Facebook and Google when it comes to online advertising? I’ll answer that question with a question. How many people use Facebook and Google versus Yahoo or AOL? Verizon is betting on itself right now, but that doesn’t mean that you have to.
As of right now, we have nothing but speculation to work with on whether it can actually become a strong player in the online advertising market. There is a lot of risk, but no proper way to evaluate the potential upside or downside of this deal. If Verizon buys Yahoo, avoid buying shares until the company proves that it can use this internet company to deliver growth.
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YAHOO! INC (YHOO): Free Stock Analysis Report
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TIME INC (TIME): Free Stock Analysis Report
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