Last Friday I closed out a profitable trade where I was short Yahoo against Baidu. The trade ended being profitable but I’m still surprised that Yahoo has continued to see its stock remain steady while the company certainly has seen its growth slow down. I found it a bit difficult and frustrating to be short Yahoo! because the recent changes in the structure have been followed by almost weekly announcements of changes in the direction, or new technology arrivals. It is to be expected of course and it is putting upward pressure on the company but in my opinion the major story going on is still the mass departures of key employees and lack of overall direction in the company. I still find it a great opportunity to trade on and will get on another trade against the purple company:)
This trade is one done for two main reasons but first just a brief intro on WebMD for those who are not familiar with it. WebMD.com is a website dedicated to providing online information related to health. Its major strentgh is the credibility it has built over time and it has obviously been adding content over the years making it by far the leader in the field. While other web portals have been starting to look into competing with WebMD (including Google Health), no one has quite provided a comparable quality of information.
So the two main reasons I am looking into making this trade are direction and advertising power. First off, I have been clear about my thoughts that Yahoo! has a lack of direction. The same could perhaps be said of Google although it is clear that they have a few priorities (mobile being the biggest probably), but in Yahoo’s case, it is very unclear. They have been losing ground in many segments and while it looks like they have stopped losing ground in the search market share, it is quite unclear where the company growth will come from as it is attacked in all of its fields. The once so dominant Yahoo Finance website for example has been losing ground to competition very quickly and the same could be said in games, dating, etc. WebMD on the other hand seems to have a very clear understanding of its strengths and I firmly believe that it will benefit from its focus.
As well, both companies are dependant almost 100% on advertising for their revenues and while Yahoo! certainly has a lot more diversification, they are also a lot more dependant on the overall health of the advertising sector and the overall economy’s strength. Health companies and pharmaceuticals might see a slowdown but they are generally less prone to retraction. As well, such companies have a much slimmer array of possibilities when wanting to target customers. WebMD should therefore be able to maintain its pricing power a lot more than Yahoo in the current context.
There is a lot more speculation regarding Yahoo and a possible match with Microsoft but I still feel that valuations do not make sense as they are both trading to comparable P/E’s but I see WebMD still growing while Yahoo is not clearly going in the same direction…! So I will enter this trade at today’s market open!