Can a Company Really Have Negative Value?

Can a Company Really Have Negative Value 1

Can a Company Really Have Negative Value 1

The strange situation Yahoo have found themselves in

It lost the battle with Google over which search engine will power the Internet in the last decade or so, but Yahoo is still on the map. Thanks to some shrewd investing and tooth and nail efforts they still have a share in the search market and have some nice mini-growth areas like fantasy football, Yahoo finance and Yahoo answers.

Combined with the appointment of Marissa Mayer as CEO – a superstar from Google, intimately aware of how they built their success – Yahoo was supposed to be a serious and direct opponent that pushed Larry Page and Sergey Brin’s company. Things definitely didn’t unfold that way.

Almost all new campaigns and product launches have been either lackluster or plain failures. Save for the share in Alibaba and Yahoo Japan, the company has seen a steady decline of overall user numbers.

At the same time, the early entry in Alibaba has proven to be an excellent bit of business. Former CEO Jerry Yang believed in the project and invested $1 billion in it through his connection with Jack Ma whom he knew from their time together in the Chinese Ministry of Trade. Last week that share was spun off in a separate company (saving $10 billion in taxes), prompting the share price to jump 8%.

But the underlying current of doubt quickly resurfaced and all the upside was erased and even reversed with the price currently around $44 – 7% lower than last Tuesday.

Why did prices still go down after something universally accepted as positive happened? It’s for the same reason that last year Yahoo’s core business was valued at around -$13 billion by some analysts.

We’ll have to delve deeper into the technical side to explain this. First of all, this isn’t about the share price – that one can’t go below zero. It concerns the value of the company itself and can be explained with a bit of strange math – the stakes the mother company has in Yahoo Japan and the recently spun-off one in Alibaba combined, were worth more than the two put together with the main business of Yahoo. And this is a fact even though the latter brings in profits at the moment.

So the whole is less than its separate parts? The answer is yes and the explanation for this is that the final third of the Yahoo business is surrounded by uncertainty, leading many people to believe that the current profits are nothing but a temporary blip before it starts losing money. In this scenario the profits from the first two would have to be used to cover those losses – diminishing their overall impact and ultimately leading to less of a gain for shareholders.

Can a Company Really Have Negative Value 2
Yahoo CEO Marissa Mayer

All this is an excellent example of what market participants value more. It’s not numbers and facts – it’s how they are perceived. The two things can become very different when it comes to predicting how and where a company is headed, both in fundamental and in technical terms. There is no other area where the adage “past results are no guarantee of future performance” is more true.

It’s also a valuable example of what many of the companies in the stocks section in Trading 212 PRO actually are – they are never just a brand, or a single product or service. In the modern-day economy, diversification is the bare minimum needed to survive – in order to thrive you have to do it well. Although they ultimately lost out to Apple and partially Samsung, we always remember Nokia, who is still a very good example of a company that has changed its core business several times across many decades.

So what is the effect of someone branding the core business of a company that still has profits, as having negative value? Short answer – it builds up pressure.

This pressure is aimed at the CEO and warrants results and improvements, as the future of the company doesn’t look good and has been that way for some time. If things do turn around, then the success will be quite impressive, because it will mean some serious competitors have been overcome. The share price will most likely follow suit and skyrocket, but if they don’t, then we might see shares get as close to negative as they can get.

Our next article will be available tomorrow at 4:00pm – “The Coming Week 9-13.2.15”

Share on:

Leave a Reply

Your email address will not be published.