Merrill Lynch Surprise: Downgrade Google (NASDAQ:GOOGL) and Upgrade Yahoo! (NASDAQ:YHOO) on Alibaba (NYSE:BABA)
The multibillionaire giant Google (NASDAQ:GOOGL) has dominated and been leading the internet based services now for quite some time and no one expects to see a company like Yahoo! (NASDAQ:YHOO) coming even near to a giant like Google (NASDAQ:GOOGL). However, quite recently the analysts have started to downgrade Google (NASDAQ:GOOGL) and are upgrading Yahoo! (NASDAQ:YHOO) Inc. The analysts Justin Post and Joyce Tran from Merrill Lynch’s media on Friday morning have been seen giving such calls. They took Yahoo! (NASDAQ:YHOO) up to buy and Google (NASDAQ:GOOGL) down to neutral on the giant Alibaba (NYSE:BABA) Group Holding exposure. The Merrill Lynch team cut the target price from $600 to $580 with the downgrade of Google (NASDAQ:GOOGL) being based on various reasons including increasing regulatory risks specially in the European Union, search contract with renewal uncertainty, competition with giants like Facebook (NASDAQ:FB) in the advertisements sector, the Apple (NASDAQ:AAPL)’s strong product cycle, and the gains in shares from the social media of the US online advertising market.
The estimated revenue target expectations were lowered by the Merrill Lynch $73.32 billion to $33.81 per share. The target revenue of that $580 is based on almost 17 times estimates of lowest earnings that is 5 percent less the consensus. While on the other hand Yahoo! (NASDAQ:YHOO)’s upgrade ratings went to buy from the previous neutral phase and target price raised from $55 to $62 in the call. The main reason of the upgrade was Alibaba (NYSE:BABA) and the upside tax potential.
According to the Merrill Lynch they had underestimated Alibaba (NYSE:BABA) for most of 2015, and thought that the Yahoo! (NASDAQ:YHOO) remaining stake and potential tax amounts will take almost a year to get visible and that Yahoo! (NASDAQ:YHOO) will be trading at sum of parts discount to the original assets valuation. According to Yahoo! (NASDAQ:YHOO) CFO there are no immediate plans on any change in Yahoo! (NASDAQ:YHOO)’s strategy what so ever and the company maintains a positive stance to find potential solutions to the promised tax. He said that Yahoo! (NASDAQ:YHOO) will reveal its plans in its next years’ earnings call. The recently updated Eddie Leungs price objective data is being used by the Merrill Lynch team for Alibaba (NYSE:BABA) at $132 per share. The team made calculations on assumptions of 19% unchanged tax and a little higher 6.5 times the core of Yahoo! (NASDAQ:YHOO) EBITDA 2016.
The $90 downside case is expected to generate Yahoo! (NASDAQ:YHOO) target at $43 down however the current core generation of Alibaba (NYSE:BABA) at $109 is $55 stocks price for Yahoo! (NASDAQ:YHOO) Inc. The indications were clear regarding the Google (NASDAQ:GOOGL)’s share which went down by 1.1% on Friday’s premarket trading at $531.50 against the 52 weeks old range of $502.80 to $604.83. $642.50 was declared the targeted analysts price. Moreover, the Yahoo! (NASDAQ:YHOO)’s share were also seen going up to $1.3 at $51.08 against the $32.15 to $52.62 one year old range versus the consensus declared analyst target price of $50.6.
This comes as a pleasant surprise to those who were Yahoo (NASDAQ:YHOO) supporters.