Yahoo’s patent lawsuit yet another reason to be bearish

Two weeks ago when news first surfaced that Yahoo was threatening legal action against Facebook I tweeted:

As a former Yahoo I’m saddened to see the patent threat at Facebook. Ideas are a dime a dozen. Execution wins.

Fast forward to today, the lawsuit is now official, the blogosphere is buzzing about it, and my thoughts are largely the same. The lawsuit it BS. And it is an important reminder that our patent laws must be updated for today’s world – at least for the internet sector in which ideas on a piece of paper stamped by the patent office are worthless without the execution chops to bring those ideas to life.

But with the news re-surfacing today it got me thinking about this story from another angle – shareholder value. Simply put, will this make Yahoo a more valuable company for its shareholders? My belief? No, it will not. In fact, this latest development makes me much more bearish about YHOO as an investment. Even if successful with this lawsuit, it would likely translate into a one-time financial gain similar to their agreement with Google back in 2004 stemming from a search patent dispute. It will not positively change the trajectory of Yahoo’s underlying business, product, revenue, or cash flows. The intrinsic value of any company is the present value of all future cash flows, and since one-time gains (and losses) are relatively small compared to the present value of all future cash flows in perpetuity, they are often ignored by investors. Unless Yahoo were somehow able to get a cut of Facebook’s future revenue stream (this is extremely unlikely), I expect investors will ignore this one-time gain as well. Furthermore, the distraction from this lawsuit means that Yahoo’s leadership is spending less time focusing on creating compelling consumer and advertiser technology products, i.e., the types of activities that actually could positively change the long-term trajectory of Yahoo’s revenues and cash flows. Consequently, I believe that this lawsuit nonsense increases the likelihood that Yahoo’s cash flows actually shrink – not grow – over time.

There were plenty of reasons to be bearish about YHOO before today. Now there is one more.

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