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Trading at a premium solely based on possible merger deal

If we follow Yahoo's fundamentals and compare its financial performance with companies with similar P/E ratios, we would value Yahoo at about 15 dollars a share. Because Microsoft's stock has declined, the value of its offer (which included a stock component) has upset the yahoo board, which feels that it can fetch a higher price. The current 27 dollar price is very volatile and will be subject to enormous fluctuations based on any update in the merger talks. Rationally, this deal should be the best option for shareholders of Yahoo!, because the firm has no realistic target of regaining its share value to 27 dollars any other way.

Yahoo Inc (NASDAQ:YHOO), the world’s second largest search engine, has been a relatively flat stock since 2005. Only recently since a formal proposal for takeover from software giant Microsoft Inc. (NASDAQ:MSFT) has the stock seen a boost in price.

What many investors fail to realize is that the best-case scenario is already priced into the stock. As Yahoo!’s current pace, the stock price would be set to wither away like a dying leaf in autumn. What happens in the deal doesn’t go through? What does that mean for Yahoo! (NASDAQ:YHOO)?

In all likelihood, a drop in share price! Many investors jumped on board at the end of January when Microsoft made the proposal - only to find that their “gem” has been stagnent ever since.

It appears that Yahoo! (NASDAQ:YHOO) is a stock with tremendous downside and a small upside.

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