On February 4, 2013, I wrote an article titled "Yahoo May Be A Nice Way to Participate in the Alibaba IPO." Shortly thereafter, Cantor Fitzgerald upgraded Yahoo (YHOO) stating:
"The analysts raised their target price for YHOO to $26 from $21, after adjusting the Alibaba/YHOO Japan valuation on new disclosures."
Barclays Capital also issued an upgrade stating:
Alibaba's valuation has probably risen to $55 billion from the $40 billion at which the company raised capital back in Q3 of last year, writes DiClemente, increasing the value to YHOO! by $2.23 billion to $8.98 billion.
CNBC even highlighted the issue on Squawk in the Street.
"Barclays upgrading YHOO saying markets underestimating the value of the stakes in Alibaba"
When the article was initially published on February 4, YHOO closed at $19.34. YHOO is currently trading at $22.04, an increase of over $13% in just over a month.
While it is highly unlikely that the original article had an impact on Barclays Capital's or Cantor Fitzgerald's decision, their upgrades and subsequent stock price movement add credibility and validity to the theory it outlined. Additionally, the upgrades and related articles provide information badly needed to analyze this issue.
The Barclays article defines an estimated value for the YHOO Alibaba holdings of $55 billion, up from $40 billion in Q3 2012. That is a 37.5% increase in less than one year. It also states the increase to YHOO being between $2.23 billion and $8.98 billion. YHOO has 1.1 billion shares outstanding, so the value per share is between $2.00 and $8.16, a wide range yes, but a wide range on the upside. It is worth noting that the Cantor Fitzgerald estimate was increased by $5 from $21 to $25, which is essentially the mid-point between Barclays' estimate of an increase of $2.00 to $8.16.
The importance of the upgrades is that the markets now have a benchmark on which to measure the Alibaba IPO, something that was not available at the time the original article was written. We now know that Wall Street has a public estimate of $55 billion for the YHOO Alibaba holdings. It will be relatively easy not to track future adjustments to this value, and compare preliminary estimates of the eventual IPO when they are released. If the numbers released are higher than $55 billion, expect YHOO to respond positively; if they are less than $55 billion, expect YHOO to respond negatively. It may actually be that simple.
Is it too late? I doubt it; this is very early in the process. One Seeking Alpha article and two upgrades leaves a lot more to come. I would expect that as we get closer to the actual IPO, more and more major brokerages will release research on this topic, and so far this issue has resulted in 2 for 2 upgrades and no downgrades. I would expect more of the same, but time will tell. No data about the actual IPO has been released. We don't know how many shares will be offered, at what price or when. We don't know if those numbers will be revised either upward or downward, and how well received the IPO will be by the markets before it is issued. Lastly and most importantly, we don't know where the IPO will open, and how it impacts the price of YHOO stock once it is issued.
In conclusion, in my opinion, it is early in the process of the Alibaba IPO, and this event will likely have a significant impact on the stock price of YHOO. Investors now have some critical metrics on which to benchmark the Alibaba IPO, and an event timeline to follow. So far the market's reaction has been positive to the IPO news, and I will continue to write about it as more and more information comes to light. As of right now, jot down $55 billion as our starting point, and check back frequently for any updates.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.