You are on page 1of 8

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White

FIN 330: Professor Clifford Ang


Yahoo! Inc. Valuation Project
June 3, 2013

Yahoo Equity Value per Share Analysis Valuation date of May 1, 2013
Comparable Company Valuation
We first identified potential comparable companies for Yahoo from the companys 10-K SEC filing as well as
other data sources such as Yahoo Finance and YCharts. We selected 10 companies that we thought could
potentially be used in a comparable company valuation for Yahoo. We have included the full list of potentially
comparable companies here.
YAHOO! Inc.
Selection of Comparable Companies
All figures for fiscal year ended March 31, 2013 and in ($ thousands) except for percentages and multiples

Market
Shares
Capitalization Outstanding
($ thousand)
(thousand)
$2,966,000
77,300
$265,200,000
331,010
$61,550,000
2,411,000
$238,860,000
8,349,000
$3,765,000
83,680
$30,660,000
349,710
$19,200,000
110,160
$4,030,000
660,170
$2,639,000
793,330
$121,130,000
455,000

Company
AOL Inc.
Google
Facebook
Microsoft
IAC/Interactive Corp
Baidu
LinkedIn
Groupon
Zynga
Amazon

Shareholders
Equity
($ thousand)
$2,178,000
$75,470,000
$11,820,000
$76,690,000
$1,637,000
$4,558,000
$991,340
$766,360
$1,864,000
$8,432,000

Enterprise
Total
Total
Value
Debt
Liabilities
($ thousand)
($ thousand) ($ thousand)
$2,501,000
$104,200
$584,900
$219,260,000
$7,380,000 $21,220,000
$52,810,000
$2,260,000
$3,339,000
$185,480,000 $14,760,000 $57,420,000
$3,642,000
$580,000
$2,144,000
$27,380,000
$1,900,000
$3,142,000
$18,450,000
$0
$518,190
$2,819,000
$0
$1,216,000
$1,454,000
$100,000
$659,340
$112,770,000
$3,040,000 $19,940,000

Debt /
Total
EBITDA
EV /
Equity
Revenues
EBITDA
Margin
EBITDA
(%)
($ thousand) ($ thousand)
(%)
(multiple)
4.78%
$2,201,000
$482,300 21.91%
5.19
9.78% $53,500,000 $16,810,000 31.42%
13.04
19.12%
$5,489,000
$1,310,000 23.87%
40.31
19.25% $76,010,000 $30,490,000 40.11%
6.08
35.43%
$2,903,000
$451,000 15.54%
8.08
41.68%
$3,826,000
$2,050,000 53.58%
13.36
0.00%
$1,109,000
$149,470 13.48%
123.44
0.00%
$2,377,000
$142,640
6.00%
19.76
5.36%
$1,224,000
$143,730 11.74%
10.12
36.05% $63,980,000
$2,710,000
4.24%
41.61

EV /
Revenue
(multiple)
1.14
4.10
9.62
2.44
1.25
7.16
16.64
1.19
1.19
1.76

LT EPS Selected
Growth
Comp?
(%)
15.45%
Yes
14.93%
Yes
29.19%
Yes
8.53%
Yes
30.44%
20.16%
58.43%
24.68%
21.00%
37.15%

Average (all comps)


Median (all comps)

$75,000,000
$24,930,000

1,362,036
402,355

$18,440,670
$3,368,000

$62,656,600
$22,915,000

$3,012,420
$1,240,000

$11,018,343
$2,643,000

17.15%
14.45%

$21,261,900
$3,364,500

$5,473,914
$896,150

22.2%
18.7%

28.10
13.20

4.65
2.10

26.00%
22.84%

Average (selected comps)


Median (selected comps)

$142,144,000
$150,205,000

2,792,078
1,371,005

$41,539,500
$43,645,000

$115,012,750
$119,145,000

$6,126,050
$4,820,000

$20,640,975
$12,279,500

13.23%
14.45%

$34,300,000
$29,494,500

$12,273,075
$9,060,000

29.33%
27.64%

16.16
9.56

4.32
3.27

17.03%
15.19%

$25,490,000

1,085,000

$14,140,000

$21,770,000

$36,000

$2,351,000

0.25%

$4,906,000

$1,330,000

27.11%

16.37

4.44

13.53%

Yahoo Inc.

Source: Bloomberg / Yahoo Finance / YCharts

Given Yahoos metrics, we decided to utilize the following criteria to select our comparable companies:
1. Debt/Equity ratio of 0% - 20%
2. EBITDA Margin greater than 20%
3. Long-term EPS Growth of 5% - 30%
4. EV / EBITDA ratio between 5 and 45
Based on our criteria, we selected AOL, Google, Microsoft, and Facebook as our Selected Comps for our
valuation analysis.
YAHOO! Inc.
Selection of Comparable Companies
All figures for fiscal year ended March 31, 2013 and in ($ thousands) except for percentages and multiples

Company
AOL Inc.
Google
Facebook
Microsoft

Yahoo Inc.

Market
Capitalization
($ thousand)
$2,966,000
$265,200,000
$61,550,000
$238,860,000

$25,490,000

Shareholders
Equity
($ thousand)
$2,178,000
$75,470,000
$11,820,000
$76,690,000

Total
Debt
($ thousand)
$104,200
$7,380,000
$2,260,000
$14,760,000

Debt /
Equity
(%)
4.78%
9.78%
19.12%
19.25%

Debt /
Capital
%
4.57%
8.91%
16.05%
16.14%

Total
Revenues
($ thousand)
$2,201,000
$53,500,000
$5,489,000
$76,010,000

EBITDA
($ thousand)
$482,300
$16,810,000
$1,310,000
$30,490,000

Average (selected comps)


Median (selected comps)

13.23%
14.45%

11.42%
12.48%

$34,300,000
$29,494,500

$12,273,075
$9,060,000

29.33%
27.64%

0.255%

0.254%

$4,906,000

$1,330,000

27.11%

$14,140,000

Source: Bloomberg / Yahoo Finance / YCharts

$36,000

EBITDA
EV /
Margin
EBITDA
(%)
(multiple)
21.91%
6.15
31.42%
15.78
23.87%
40.31
40.11%
7.83

17.52
11.81
16.93

LT EPS
Growth
(%)
15.45%
14.93%
29.19%
8.53%

17.03%
15.19%
13.53%

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White
We decided to use the following multiples to value Yahoo:
1. Next Twelve Months Enterprise Value / Forward Revenues
2. Next Twelve Months Enterprise Value / Forward EBITDA
3. Price / Forward Earnings Per Share
We used the average multiples of our selected companies for our valuation. Based on these multiples we
arrived at a Yahoo valuation of $15.66 based on EV/Revenues, $13.96 based on EV/EBITDA, and a much
larger value of $34.02 based on the Price/Earnings ratio.

Yahoo! Inc.
Comparable Company Valuation As of March 31, 2013
All figures for fiscal year ended March 31, 2013 and in ($ thousands) except for percentages and multiples

Company
AOL Inc.
Google Inc.
Microsoft Corp.
Facebook

Next 4 Qtr
Enterprise Value
($ thousand)
$2,274,274
$241,718,180
$232,094,340
$52,074,211

Next 4 Qtr
Revenues
($ thousand)
$2,263,333
$62,720,000
$80,853,333
$7,313,333

Next 4 Qtr
EBITDA
($ thousand)
$436,521
$22,654,000
$34,849,000
$3,711,633

Share Price
as of
Next 4 Qtr
4/30/2013
EPS
$38.64
1.66
$824.57
48.53
$32.87
2.86
$27.77
0.64
Average
Median

Yahoo's Metric ($ thousands)


Implied EV ($ thousands)
Less: Debt ($ thousands)
Implied Equity Value ($ thousands)
Divide: Shares Out. (thousands)
Equity Value per Share

Next 4 Qtr
TEV /
Revenues
1.00x
3.85x
2.87x
7.12x
3.71x
3.36x
$4,576,667
$16,990,609
-36,000
$16,954,609
1,083,000
$15.66

Next 4 Qtr
TEV /
EBITDA
5.21x
10.67x
6.66x
14.03x
9.14x
8.67x
$1,657,504

Next 4 Qtr
Price /
Earnings
23.28x
16.99x
11.49x
43.39x
23.79x
20.13x
1.43x

15,153,730
-36,000
15,117,730
1,083,000
$13.96

$34.02

Source: Bloomberg / Yahoo Finance / YCharts

Weighted-Average Cost of Capital


In order to perform the discounted cash flow analysis (DCF) we needed to calculate Yahoos WACC. Because
of the limited amount of historical data for some of our comps, we chose to calculate the beta of Yahoo and
the other companies using daily returns over a 1 year period from May 1, 2012 to May 1, 2013. We used the
S&P 500 as the index for our market proxy. Using Bloomberg, we found Yahoos raw beta of 0.674.

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White
We also used the average beta of our comp companies over the same period to estimate Yahoos beta. The
average of our selected comps unlevered betas was 0.761. Using that, Yahoos debt/equity ratio of 0.255%,
and a tax rate of 34% (from Yahoos 10-Q for period ending March 31, 2013, given as their projected effective
tax rate), we estimated a relevered beta for Yahoo of 0.762.

YAHOO! Inc.
Beta Calculation

Company
Microsoft (MSFT)
AOL (AOL)
Google (GOOG)
Facebook (FB)

1 Year

Levered Beta
2 Year

1.070
0.988
0.897
0.331

0.879
1.041
0.872

5 Year
0.924
0.972
0.905

Debt /
Capital
(%)
4.57%
8.91%
16.05%
16.14%

Debt /
Equity
(%)

1 Year

Unlevered Beta
2 Year
5 Year

19.25%
4.78%
9.78%
19.12%

0.949
0.958
0.843
0.294

Average (selected comps)

11.42%

13.23%

0.761

Median (selected comps)

12.48%

14.45%

0.90

0.255%
0.255%

0.762
0.674

Yahoo Inc. Relevered Beta from Average of Selected Comps


Yahoo's 1-year Beta from Bloomberg

0.783
1.010
0.821

0.823
0.943
0.852

Source: Bloomberg

We relied on the Bloomberg terminal to obtain Yahoos pre-tax cost of debt because the company has very
little debt and no bonds currently issued. Bloomberg showed a pre-tax cost of debt of 1.82%. Given the very
small portion of the capital structure consisting of debt (0.25%) for Yahoo, this should not impact the WACC
significantly.

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White
We obtained our risk-free rate from data provided by the Federal Reserve based on the monthly 3-month Tbill yield from January 1934 to April 2013. We averaged the data provided to obtain a risk-free rate of 3.69%.
We obtained the equity risk premium from the Bloomberg terminal because we were unable to obtain data
for the S&P returns for the equivalent historical period. Bloomberg provided an equity risk premium of
6.41%.
Yahoo Inc.
WACC Calculation
Risk-free Rate per Federal Reserve
Historical Equity Risk Premium from Bloomberg

3.69%
6.41%

Target Debt/Capital on Average of Selected Comps


Implied Target Equity/Capital

11.97%
88.03%

Pre-Tax Cost of Debt from Bloomberg


After-tax Cost of Debt (tax rate @ 34% as per Yahoo 10-Q)

1.820%
1.201%

Based on Selected Comps


Selected Comps' Average Unlevered 1-Year Beta
Yahoo's Debt / Equity Ratio
Yahoo's Relevered Beta (tax rate @ 34%)

0.761
0.255%
0.762

Cost of Equity Using CAPM

8.58%

WACC based on Selected Comps Unlevered Beta

7.69%

Based on Yahoo's Equity Beta


Yahoo's Raw Equity Beta per Bloomberg
Cost of Equity Using CAPM
WACC based on Yahoo's Beta

0.674
8.01%
7.20%

Based on these inputs, we calculated a WACC based on our comps betas of 7.69% and a WACC based on
Yahoos beta of 7.20%.

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White
Discounted Cash Flow Analysis
Based on these inputs, we calculated a WACC based on our comps betas of 7.69% and a WACC based on
Yahoos beta of 7.20%.
From the free cash flows given for the years 2013 2020 and a perpetuity growth rate of 1%, we performed 2
DCF valuations using a discount rate of 7.20% and a discount rate of 7.69%. The DCF using the WACC based
on our comps beta, 7.69%, resulted in a $9.56 equity value per share. The DCF analysis using the WACC based
on Yahoos beta, 7.20%, gave a $9.26 equity value per share.
As of April 30, 2013 Yahoos share price was $24.73.
Yahoo Inc.
Discounted Cash Flow Analysis
figures are in $ thousands, except per share amounts and percentages

Assumptions
Perpetuity Growth Rate (Terminal)
Discount Rate (Selected Comps)
Total Debt
No. of Shares Outstanding

1.00%
7.20%
$36,000
1,083,000

Free Cash Flow


PV of Cash Flow

2013
$916,000
$583,286

Calculation of Yahoo's Equity Value


NPV @ 7.20% Discount Rate
Plus: NPV of Terminal Value
Implied Enterprise Value
Less: Debt
Equity Value
No. of Shares Outstanding
Implied Share Price
Closing Price on 4/30/13

For 2013 cash flow s, must discount back to end of April, w hich is 8/12 months, or 0.667 years.

2014
$599,000
$533,448

2015
$677,000
$562,418

2016
$648,000
$502,170

2017
$598,000
$432,297

2018
$662,000
$446,421

2019
$655,000
$412,034

2020
$650,000
$381,426

$3,853,498
$6,213,547
$10,067,046
$36,000
$10,031,046
1,083,000
$9.26
$24.73

Yahoo Inc.
Discounted Cash Flow Analysis
figures are in $ thousands, except per share amounts and percentages

Assumptions
Perpetuity Growth Rate (Terminal)
Discount Rate (Selected Comps)
Total Debt
No. of Shares Outstanding

1.00%
7.69%
$36,000
1,083,000

Free Cash Flow


PV of Cash Flow

2013
$916,000
$581,514

Calculation of Yahoo's Equity Value


NPV @ 7.69% Discount Rate
Plus: NPV of Terminal Value
Implied Enterprise Value
Less: Debt
Equity Value
No. of Shares Outstanding
Implied Share Price
Closing Price on 4/30/13

$3,786,621
$5,560,579
$9,347,200
$36,000
$9,311,200
1,083,000
$8.60
$24.73

For 2013 cash flow s, must discount back to end of April, w hich is 8/12 months, or 0.667 years.

2014
$599,000
$529,408

2015
$677,000
$555,619

2016
$648,000
$493,842

2017
$598,000
$423,193

2018
$662,000
$435,031

2019
$655,000
$399,694

2020
$650,000
$368,320

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White
We also performed a sensitivity analysis for the DCF analysis covering a growth range of 0% - 3.00% and a
discount rate range of 6.00% - 9.00%.

0.0%
0.5%
1.0%
1.5%

6.00%
$10.08
$10.70
$11.44
$12.34

6.50%
$9.31
$9.82
$10.42
$11.13

7.00%
$8.65
$9.07
$9.56
$10.14

Discount Rate
7.50%
$8.08
$8.44
$8.84
$9.32

8.00%
$7.58
$7.88
$8.23
$8.62

8.50%
$7.14
$7.40
$7.69
$8.02

9.00%
$6.75
$6.97
$7.22
$7.50

2.0%
2.50%
3.00%

$13.47
$14.93
$16.87

$12.01
$13.11
$14.51

$10.84
$11.69
$12.75

$9.88
$10.55
$11.38

$9.08
$9.62
$10.28

$8.40
$8.85
$9.38

$7.82
$8.19
$8.63

Growth Rate

Sensitivity Analysis

Valuation Summary for Yahoo


Our valuations using the Enterprise Value multiples resulted in an equity value per share well below the
share price of Yahoo, but the valuation using Price / Forward EPS gave an equity value per share significantly
higher than Yahoos share price.
The DCF analysis using the given projected free cash flows also gave an equity value per share well below
Yahoos share price. From our valuation procedures we would have to say that Yahoos stock does not appear
to be fairly valued as of May 1, 2013.

Yahoo Inc.
Summary of Valuation As of May 1, 2013
Low
Comparable Company Valuation
Next 4Q TEV / Forward Revenue
Next 4Q TEV / Forward EBITDA
Price / Forward EPS
Discounted Cash Flow Analysis
Valuation Range
Yahoo's Stock Price as of April 30, 2013

Mid

High

$15.66
$13.96
$34.02

$7.88

$8.84
$24.73

$10.14

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White

Appendix
This is a reference for how we obtained and calculated values for our potential comp companies. AOL is used
as an example.

AOL Forward Estimates


Revenue Est
Avg. Estimate
Low Estimate
High Estimate
Sales Growth (year/est)

Current Year
$2,250,000
2.20B
2.28B
2.50%

Next Year
Next 12 Months (5/1/13 - 5/1/14)
$2,290,000
$2,263,333
1.89B
2.45B
2.00%

EPS Trends
Current Estimate
7 Days Ago
30 Days Ago
60 Days Ago
90 Days Ago

Current Year
1.49
1.49
1.60
1.57
1.51

Next Year
Next 12 Months (5/1/13 - 5/1/14)
1.83
1.83
1.79
1.66
1.76
1.71

Growth Est
Next Year
Past 5 Years (per annum)
Next 5 Years (per annum)
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
Fwd EBITDA and Enterprise Value
EBITDA
EV / EBITDA
Enterprise Value

AOL
22.80%
-32.07%
15.45%
24.52
1.59

Industry
32.90%
N/A
16.64%
21.97
1.69

S&P 500
12.10%
N/A
9.40%
13.32
1.33

Q2 2013 Est
$101,323

Q3 2013 Est
$104,377

Q4 2013 Est
$124,154

Long-term EPS Growth


15.45%

Q1 2014 Est
$106,667
EV / EBITDA
Enterprise Value

Next 4Q Est
$436,521
5.21
$2,274,274

Source: Bloomberg / Yahoo Finance / YCharts

This is a screenshot from Bloomberg terminal showing that Yahoo has no bonds currently issued from which
to obtain an estimate for the pre-tax cost of debt.

Nigar Abbas-Zada, Kevin McCarty, Lauren Peri, Blake Vazales, Eric White
Another screenshot from Bloomberg terminal displaying some potential comp companies for Yahoo.