Yahoo! Valuation
Valuecruncher has placed a value of US$29.63 with a range of US$23.19 to US$36.87. We believe that Yahoo is currently under-valued with its current share price of US$26.72.
Key Assumptions
Revenue Growth
Revenue growth for Yahoo! has been slowing over the past 2 years with growth of 120.0% for the 03/04 period and 47.1% for the 04/05 period. From the available data we have assumed the revenue growth for the 05/06 period to be 35% and the growth in the periods 06/07 and 07/08 to be 25% and 15%, respectively.
EBIT Margins
EBIT margins have been growing over the past three years, ranging from 24% in 2003 to 48% in 2005. However, we believe that the EBIT margin will decline to around 35%, similar to the comparator Google Inc. for this reason, the EBIT margin in 2006 is assumed to be 45%, declining each year by 5% to give EBIT margins in 2007 and 2008 of 40% and 35%, respectively.
Terminal Growth
Terminal growth has been estimated to be 6%. This maybe too aggressive – we are giving Yahoo! credit for the option set that they hold in the internet sector (which is arguably a broader option set than Google). If the terminal growth rate drops to 4% then our valuation mid-point drops to US$22.99 – below the current US$26.72 share price.
WACC
WACC has been estimated to be 12%.