Yahoo signals bearish reversal on lower revenue guidance
The last day to submit bids to acquire the search engine company Yahoo (YHOO) is on April 11th, 2016. However, considering the complex issues faced by the company, potential bidders are quite nervous, according to the report by the technology news related website Re/Code.
The share price of Yahoo hit a 12-month low of $26.15 in the second week of February. Since then, the share price had gained about 40% to close at $36.07 on last Friday. Even though the company is a potential takeover target for companies such as Verizon, a binary options trader can expect only a range bound movement or even a decline in the price due to the following reasons.
Currently, on an average, the number of visitors or users of Yahoo services is 210 million per month. The number of users stands next only to that of Google and Facebook in the USA. The company, after investing heavily in online videos, mobile software and advertisement technology, hardly realized the results it aimed for.
Yahoo, under Marissa Mayor, acquired nearly 22 companies in 2013. Starboard Value LP, which is one of the major shareholders of Yahoo, is absolutely unimpressed by the current board of directors and has vouched to replace it in the annual meeting scheduled later this year. With pressure building from the shareholders, the company has no other go but to sell off its core business or spin off its investments in Alibaba and Yahoo Japan.
Yahoo owns 15% shares of Alibaba, valued at $32 billion, and 35% shares of Yahoo Japan, valued at $8.5 billion. Ironically, the parent company Yahoo is valued only at $34 billion. This means that the market values the core business of Yahoo negatively. If Yahoo goes ahead with the sale of its holding in Alibaba and Yahoo Japan, it will result in a $9 billion capital gain tax. This is another issue, which Yahoo has to manage. In the fourth quarter of fiscal 2015, the company took a goodwill impairment charge of $4.461 billion.
The company anticipates a 15% decline in revenue and 20% fall in earnings for the fiscal 2016. For the fiscal 2014 and 2015, Yahoo had revenue of $4.4 billion and $4.1 billion respectively. For the fiscal 2016, the company anticipates revenue of only about $3.5 billion. Similarly, earnings before depreciation, taxes, and amortization (EBITDA) were $1.4 billion in 2014. The EBITDA declined to $1 billion in 2015 and is expected to hit a low of $750 million in 2015. Thus, fundamentally, the stock remains range bound with bearish bias.
Technically, as shown in the image below, the major resistance for the stock is at 40, while the minor support is at 34. Last major support exists at 28. The MACD main has crossed below the signal line and inclined towards the zero level. The RSI is pointing downwards after declining below the overbought region.
Thus, a binary options trader should purchase a put option contract with expiry in the second week of May. The target level or the strike price for the contract should preferably around $32.
