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Goldman Sachs analyst sees surge for Yahoo stock


SAN FRANCISCO (AP) — Goldman Sachs analyst Heath Terry isn't convinced Yahoo CEO Marissa Mayer will be able to engineer a quick turnaround, but he still believes the troubled Internet company's stock will surge by more than 40 percent during the next year.

Terry made a case for Yahoo shares rising from Wednesday's closing price of $15.61 to $22, giving them a "Buy" rating. His rationale: Investors still haven't fully appreciated the value of Yahoo's cash and investments in Asia. In a research note late Wednesday, he said he also expects the stock to get a slight lift as Mayer shares more details about her long-term plan to revive the company's revenue growth.

Just making it to $20 would be a milestone for Yahoo Inc., which is based in Sunnyvale, Calif. The stock hasn't traded above that threshold during the past four years, largely because Yahoo has been mired in a financial funk even though more advertising — the company's main source of revenue — has been shifting to the Internet.

Yahoo is sitting on a $10.6 billion gold mine in Asia, based on Terry's calculations. He estimates the company's 35 percent stake in Yahoo Japan is worth $4.8 billion and its remaining 23 percent stake in Alibaba Group is worth $5.8 billion. Yahoo just reaped an after-tax windfall of $4.3 billion by selling half its stake in Alibaba in a complex deal that also includes a payment for patent licensing rights.

Despite its sluggish growth, Yahoo remains profitable and is accumulating more cash. Boosted by the proceeds that Yahoo collected from its Alibaba deal, Terry expects Yahoo to end this year with $6.9 billion in the bank.

Add it all together, and Yahoo's Asian investments and projected year-end cash translate into $14.79 per share, Terry said. He reasons that Yahoo's business revolving around its advertising-supported website is worth another $7.17 per share, based on his expectation that the company will be able to earn 83 cents per share in 2013. The forecast assumes Yahoo's revenue will decline by about 4 percent next year as the company continues to lose advertisers and Web traffic to online search leader Google Inc. and online social networking leader Facebook Inc.

Yahoo shares gained 55 cents, or 3.5 percent, to $16.16 in Thursday afternoon trading.

But even as he touted the potential upside in Yahoo's stock, Terry still sees plenty of headaches ahead.

Yahoo's search partnership with Microsoft Corp. looms as the biggest problem. Yahoo's share of the lucrative search market has been steadily shrinking since it began relying on Microsoft's technology two years ago and, to make matters worse, the arrangement is delivering as much revenue per query as the two sides envisioned. Microsoft has been making up for the shortfall with additional payments so far, but Terry doesn't expect that compensation to continue after the financial guarantees expire next spring.

The 10-year deal with Microsoft contains an escape clause that allows Yahoo to end the partnership in 2015. Terry is hoping that Yahoo seizes on the opportunity to cut its ties with Microsoft at that point and negotiate a search partnership with Google, where Mayer worked for 13 years before defecting to her new job in July. Google and Yahoo had agreed to an alliance in 2008, only to scrap it after the U.S. Justice Department threatened to file an antitrust lawsuit alleging the partnership would stifle completion in the search market.

Terry also thinks Yahoo made a good choice in hiring Mayer as its fifth full-time CEO in the past five years, but believes it will take her several years to rehabilitate the ailing company. Although Mayer hasn't publicly shared her vision for Yahoo, Terry and other analysts believe she is poised to increase spending in an effort to boost employee morale and improve products. Since her arrival, Mayer has decided Yahoo should feed its workers free meals, just as Google does, and also gave employees free phones. In another indication that the company's purse strings will loosen under Mayer, Yahoo earlier this week announced cost-cutting specialist Tim Morse is being replaced as its chief financial officer by Ken Goldman. But without "definite future plans" that lay out a vision for the company's future, higher costs needed to retain and attract employees could hurt Yahoo, Terry said.


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