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Yahoo: No Longer the Laggard?

Andrew Keene

Yahoo (YHOO) is set to release earnings after the closing bell today. The company is coming off its first year of revenue growth since 2008, and its stock has risen in value by around 21% over the last three months. Despite years of apparent stagnation in its core business, Yahoo's bets on foreign entities, namely Chinese e-commerce giant Alibaba and Yahoo Japan (TYO:4689), have sustained its recent growth.

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The appointment of CEO Marissa Mayer brought much-needed attention to Yahoo, which was for years treated as an antediluvian remnant of Web 1.0. The markets have responded positively to the attempts at innovation and adaptation from the new management at Yahoo; despite the fact that core earnings have not managed much in the way of large-scale growth, the stock has increased in value by over 50% in the six months during which Mayer has been at the helm.

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The Q1 earnings report looks likely to be positive. A Forbes survey of analysts rated the stock a hold with 16 of 25 analysts reporting a bullish outlook in anticipation of the report. The expectation level is set at a very low marker of 2% growth relative to the same time last year, a very realistic margin. In the event that Yahoo's core business falls short of expectations, its large stake in Alibaba, which is expected to IPO later this year, and a 35% stake in Yahoo Japan are holdings that possess as of yet locked value. The news of Alibaba's planned IPO emerged in January, and enthusiasm and expectation around the possibility of such an event have yet to die down. Yahoo's stock price will likely continue to be bolstered by this growth, though in the immediate term Yahoo's core business and Marissa Mayer will need to prove their capacity to remain relevant in a changing industry. If today's report is positive, it will be another small step toward a bright future for the stock.

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The Trade: Buying the YHOO April 24-25 Bull Call Spread for $.34 debit
Risk: $34 per 1 lot
Reward: $66 per 1 lot
Breakeven: $24.34

Greeks of this Trade:

Delta: Long
Gamma: Long
Theta: Short
Vega: Long

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