News came out today that leading Chinese internet giant Alibaba Group is planning an IPO in 2013 or 2014. The rumors have spread across several leading Chinese technology news sites. News of an IPO will give investors the opportunity to invest in a huge Chinese tech conglomerate, but also will put Yahoo (YHOO) in the spotlight for 2013.
Yahoo purchased a 40% stake in Alibaba Group in 2005 for $1 billion. The stake has been a hard one for Yahoo and investors to value with Alibaba being privately held. Recently, Alibaba bought back 20% of the ownership stake from Yahoo. Alibaba paid Yahoo $6.3 billion in cash, $800 million in preferred shares of Alibaba, and a one-time payment of $550 million. The $7.6 billion total payment valued Alibaba at $38 billion.
Alibaba Group operates with seven major subsidiaries:
· Alibaba.com International
· Alibaba Cloud Computing
· Alibaba China
The company also has key affiliates in China Yahoo and Alipay. With its ownership stakes in these companies, Alibaba is essentially an Amazon (AMZN), Ebay (EBAY) and Groupon (GRPN) all rolled into one. Alipay is the leading online payment option in the country of China with 800 million registered users, beating Ebay's Paypal unit in the most populous nation.
A simple $40 billion valuation would give Yahoo's remaining stake a value of $8 billion. Yahoo has 1.18 billion shares outstanding, giving the Alibaba stake a cash value of $6.78 per share. Forbes analyst Eric Jackson thinks Alibaba could be worth $150 billion by 2016, which seems a little on the high side, but might not be out of the question as the IPO will bring the company's units into the spotlight and could show off a sum of all parts valuation. Conservatively, I think at the time of an IPO, Alibaba will be worth $50 billion, representing $8.47 per share.
Alibaba has the rights to purchase half of Yahoo's remaining stake at the time of an IPO. This could bring in over $4 billion in cash to Yahoo. The internet search giant is already sitting on $8.4 billion in cash, or $7.11 per share. New CEO Marissa Mayer is making small acquisitions to help bring key talent to her new company.
The cash and Alibaba positions alone represent a per share value of $15.58. Yahoo shares have recently hit a new fifty two week high of $19.76. Shares are up 22% in the last year, but are headed higher. As rumors swirl of an IPO of Alibaba, Mayer is busy building Yahoo's relevance back up.
As a value play, shares of Yahoo look cheap. When subtracting out the cash position of $7.11, Yahoo shares trade at 11 times 2013 projected earnings per share of $1.14. Yahoo has beat analysts' expected earnings per share in each of the last three quarters. Yahoo certainly appears to be back from the dead and 2013 could be one of its best years.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in YHOO over the next 72 hours.