I have been a holder of Yahoo (YHOO) shares since Marissa Mayer took over as CEO. Despite the fact she has not engineered any organic growth at the company, instead doing a lot of chopping-and-changing, buying cloud-based start-ups while cutting staff, the company's shares have more than doubled in value under her watch.
This is entirely due to the company's holdings in Alibaba, the Chinese e-commerce giant. Yahoo sold a big hunk of its Alibaba stake to facilitate its IPO, since the Chinese didn't want the company going public there with a U.S. firm holding a controlling stake. This created a huge dividend for Yahoo shareholders.
The news from China has just gotten better. Yahoo recently gave a pre-IPO report on Alibaba's numbers and they're pretty mind-blowing. Try a quarter with $1.73 billion in sales and $707 in net. It's got the growth rate of Amazon (AMZN) with the profitability of Apple (AAPL).
Alibaba combines elements of Amazon, eBay (EBAY) and a small business bank. Like Amazon, it's an e-commerce platform. Like eBay, it does auctions and has a currency. Like a bank, it makes loans. It's the banking side of its business that is the real growth driver.
There are cross-currents in the report that may infect your other investments:
Alibaba has bought a stake in a U.S. e-commerce site called ShopRunner, run by a former Yahoo CEO, Scott Thompson. That may limit cooperation between Yahoo and Alibaba going forward, or at least force Yahoo to bid for that business.
Softbank (SFTBF.PK) still owned a 37% stake in Alibaba as of July, which is important since that company has leveraged itself to the hilt in order to buy Sprint (S) and upgrade its network. The stake, which could be worth nearly $50 billion if Alibaba gets the $120 billion price it's looking for from the IPO, means it will have the cash it needs.
The New York Stock Exchange, which will be owned by InterContinental Exchange (ICE) as of next month, is looking like the natural home for Alibaba shares. Ironically that's because the U.S. market allows behind-the-scenes control of a public company through non-trading "B" shares, something China does not allow.
The main point, however, is that once Alibaba is priced, once its IPO is launched, we will know what Yahoo's stake in the company is worth. That will set a ceiling on the value of Yahoo going forward. Mayer will have to show organic growth in order to keep her stock's momentum going.
And that's when speculative owners of Yahoo will want to sell the shares, either buying directly into Alibaba or going elsewhere. Bubbles pop when their maximum value is set. The Alibaba IPO will set Yahoo's maximum value. Unless Mayer can pull a rabbit out of her hat - and bringing the full range of Alibaba services to the U.S. market would be such a rabbit - the Yahoo run will be over at that time.