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Two months, ago, I wrote a Seeking Alpha article titled Yahoo's Stock Takes Aim At $30 when the stock was trading around $23. This itself was written only slightly more than a week after I first wrote bullishly about the stock when it was around $21 in a Feb. 27 article titled Yahoo Stock Is Too Cheap. In the March 7 follow-up article I actually said "I am actually more bullish now than then." The reason involved upside revaluations of Yahoo!'s equity stakes in Asian companies.

Well, while equity valuations can change on a dime, right now it's looking like deja vu all over again; thus I'm back already with yet another bullish piece on the company, mostly for the same reasons, but also because positive mentions about the company are now proliferating. Sometimes virtuous cycles occur to a corporation; this may be happening right now to this company.

Shares of Yahoo! Inc. (NASDAQ:YHOO) continue to accelerate to the upside, backed by relevant fundamentals. Positive news flow continues to appear often, including this week following Marissa Mayer's trip to New York. The latest surge in the stock to a multi-year high came from disclosure of its Q1 quarterly filing with the SEC on Tuesday. The most important news came from its disclosure of how profitable the Asian company of which it owns 24% has become, as is discussed shortly.

From its filing, Yahoo! has two important equity interests in Asia:

Note 8 INVESTMENTS IN EQUITY INTERESTS

The following table summarizes the Company's investments in equity interests (dollars in thousands):

December 31,
2012
Percent
Ownership
March 31,
2013
Percent
Ownership

Alibaba Group

$276,389 24% $453,097 24%

Yahoo Japan

2,555,717 35% 2,425,590 35%

Other

8,051 24% 6,159 24%

Total

$2,840,157 $2,884,846

The "tail" of these interests, as it were, wags the YHOO dog right now. YHOO has a market cap of $29 B. Ignoring the company's potential for future operating profits, it might be worth just about that amount solely as an asset play. This is computed as follows.

First, Yahoo Japan:

The fair value of the company's ownership interest in the common stock of Yahoo Japan, based on the quoted stock price, was approximately $9 billion as of March 31, 2013.

Analysts are subtracting 40% for taxes to arrive at distributable cash to shareholders, so I will do the same. Doing so yields a value to Yahoo! of $5.4 B. (Note that Japan's stock market has risen in U.S. dollar terms after Q1 ended, so this amount may already be low.)

Next, the big surprise, was how profitable Alibaba has become:

The following table presents Alibaba Group's U.S. GAAP financial information, as derived from the Alibaba Group financial statements (in thousands):

Three Months Ended
December 31,
2011
December 31,
2012

Operating data (*) :

Revenue

$1,022,807 $1,840,450

Gross profit

$696,839 $1,347,875

Income from operations

$276,659 $752,585

Net income

$253,565 $649,977

Net income attributable to Alibaba Group

$236,912 $642,173

September 30,
2012
December 31,
2012

Balance sheet data (*) :

Current assets

$4,062,823 $6,510,327

Long-term assets

$3,204,144 $3,249,335

Current liabilities

$2,624,656 $3,879,596

Long-term liabilities

$4,705,347 $4,789,612

Convertible preferred shares

$1,317,526 $1,678,424

Noncontrolling interests

$65,907 $113,661

Net income rose to $650 million; note this is reported with a one-quarter lag.

Yahoo! owns 24% of Alibaba, and the very fraught question is what it can and will receive for its shares pursuant to its breakup agreement with Alibaba. There is no way to know whether there were one-time factors in the quarter, but Alibaba primarily does business in China and Asia, so I would not expect the fact that this was our Christmas quarter to be material to its results.

So let us speculate. Annualizing $650 M gives yearly income of $2.6 B. Given how fast Alibaba is growing, the immense size of its market (something of a hybrid of Amazon.com and eBay), and the potential for both horizontal and vertical growth, an IPO at 40X Q4's annualized earning would value the company at about $100 B. (It has been estimated that Alibaba already serves as a middleman or broker for over $300 B worth of commerce yearly.)

In that scenario, YHOO's 24% stake would be worth $24 B, and assuming a 40% tax rate on repatriation of that sum, we can round down and say that its shareholding in Alibaba may be worth $14 B.

Rounding down on its Yahoo! Japan stake gets us to $19 B.

Then we must value YHOO's own asset value. Tangible book value as of 3/31/13 was $10.8 B. To avoid double counting, we must subtract the following:

Note 8 INVESTMENTS IN EQUITY INTERESTS

The following table summarizes the company's investments in equity interests (dollars in thousands):

December 31,
2012
Percent
Ownership
March 31,
2013
Percent
Ownership

Alibaba Group

$276,389 24% $453,097 24%

Yahoo Japan

2,555,717 35% 2,425,590 35%

Other

8,051 24% 6,159 24%

Total

$2,840,157 $2,884,846

This subtraction yields a tangible asset value of $10.8 B minus $2.9 B = $7.9 B.

If we round up to $8 B and add this to the previously-calculated $19 B, we get $27 B, or essentially the total market cap of YHOO.

Merely as an asset play to an acquirer, what are YHOO's many regular users and its famous brand name worth? I would argue that this amount is quite large, though I cannot quantify it. Last decade, pre-financial crisis, Microsoft (NASDAQ:MSFT) was willing to pay at least $33 for every share of YHOO stock. Merely adjusting for purchasing power, that would translate to about $40 now: but there was no value to Alibaba then, and Yahoo! Japan probably had low value. So a rough equivalent might be $50 per share as a takeover target today.

A hint of the importance of Yahoo! as a strategic entity also came from the quarterly filing, which revealed that Microsoft has retroactively forced Yahoo! into a one-year renewal of its alliance with Microsoft and its Bing search engine. Yahoo! CEO and ex-Googler Marissa Mayer is not said to be happy with this arrangement, even though it may be short-term beneficial:

Yahoo, based in Sunnyvale, Calif., didn't reveal the minimum amount that it's likely to see under the Microsoft guarantee. But Yahoo Chief Financial Officer Ken Goldman told analysts last month that Yahoo's revenue would decline by about $50 million to $60 million during the rest of this year without the guaranteed Microsoft payments.

Here is some color behind her thinking:

Yahoo! Inc. Chief Executive Officer Marissa Mayer has attempted unsuccessfully to unravel a 10-year search-advertising pact with Microsoft Corp. in favor of a deal with Google Inc., according to people familiar with the matter.

Mayer began the effort to end the agreement soon after becoming Yahoo CEO in July, and she has met with resistance from Microsoft CEO Steve Ballmer, said the people, who asked not to be identified because the meetings were private.

Microsoft's agreement to provide the technology for Yahoo Web searches hasn't met estimates, prompting Mayer to seek alternatives, the people said. The pact, which expires in 2020, was reached in 2009 by Ballmer and former Yahoo CEO Carol Bartz.

As a consolation for the poor performance of its search ads, Microsoft agreed to pay revenue guarantees to Yahoo through March 2014.

Mayer also has met with representatives of Google, her former employer, who have agreed verbally upon an alternate search-ad partnership should the arrangement with Microsoft end, one of the people said. Google Chairman Eric Schmidt said in October that the company would consider a search deal with Yahoo if the Web portal inquired.

Mayer's inability to negotiate an end to the agreement means Yahoo will probably be bound to Microsoft until 2015, when either side may choose to terminate the deal.

Quick translation: Yahoo!'s eyeballs are sought-after by larger players.

Under the theory that good things tend to happen to good management, good news of a different sort was also reported:

Yahoo! Inc. has recorded $273 million in gains resulting from steps taken to guard against swings in the Japanese yen that can affect the value of its Asian operations.

After using forward contracts to lessen foreign-exchange risk related to its stake in Yahoo Japan Corp. (4689), the company had a pretax gain of $270 million in the first quarter of 2013 and $3 million for last year, Sunnyvale, California-based Yahoo said in a regulatory filing today.

Investors have applauded oversight of the company's $5.4 billion in cash by Chief Executive Officer Marissa Mayer. Most of the sum was gained through the sale of half of Yahoo's stake in Alibaba Group Holding Ltd. The decision to hedge against the yen -- the worst performing major currency against the U.S. dollar this year -- gives reassurance that management is carefully stewarding resources, said Paul Sweeney, an analyst at Bloomberg Industries.

This sort of commentary is music to the eyes and ears of YHOO shareholders. Ignoring the obligatory comments that one never knows whether "A" really implies "B" in any individual case, in general when a company is on a roll, one tends to see analysts, who speak to each other, give off good vibes about the company.

Thus one now sees this headline, also appearing Tuesday on Bloomberg.com:

Mayer Has Reinvigorated the Troops: Mendez

(Note this is a video, which I have not had time to see. But the headline alone is super.)

And then there's this, also from Tuesday:

Yahoo! Inc. Chief Executive Officer Marissa Mayer said a policy change barring employees from working at home has been well received internally and helped the company step up its introduction of new applications...

As Mayer nears her first anniversary as CEO, Yahoo has ramped up its output of new Web services and apps for mobile devices. The introduction in recent months of programs for e- mail, weather and news was made possible by what she calls the "Reese's peanut butter effect" of helping people from different disciplines collaborate to create cool new things.

All the above sort of news (publicity) at the very least suggests to me that under the surface, out of sight of the media, management may just be making real progress in turning around the basic business of Yahoo!.

As an asset play, YHOO arguably remains too cheap, though it must be acknowledged that the realizable value of Alibaba is unclear. But on the even-more bullish scenario, it also must be realized that Alibaba may go public at $140 B, not "merely" $100 B. It also should be noted that these valuations are conservative in that they assume a 40% tax rate on the profits. In any case, understanding that we are dealing with a certain amount of speculation, there remain two different ways to win with YHOO stock. The company could be acquired, perhaps at a price per share well above the $30 I was shooting for two months ago. Or, it could continue to monetize its equity investments, shrink its share count apace, and succeed in its core business, which everyone knows has almost infinite upside.

YHOO shares are up from $16 to $26 since last fall, when Ms. Mayer returned from her brief maternity leave. This could be a big long-term winner and so I continue to hold my shares. Fundamental risks abound, related both to operational issues and realizable values of Alibaba and Yahoo! Japan. Trading risks related to YHOO and its rapid price rise are also quite relevant. Nonetheless, I'm continuing to look at YHOO as a "steady as she goes" growth and value investment.

Disclaimer: Not investment advice.

Source: Yahoo Stock Can Now Aim Higher Than $30