It's not a secret that Yahoo (YHOO) is now mostly a function of Alibaba. Yahoo posts nearly daily share price records due to the investor anticipation regarding the upcoming Alibaba IPO. The thinking is simple: Yahoo is the way to invest in Alibaba, before you can invest in Alibaba.
Yahoo holds 24% of Alibaba. Alibaba is expected to see its IPO in early 2014, and might gather a valuation of as much as $110 billion. This would value Yahoo's share at $26.4 billion.
With all of Yahoo trading for a market capitalization of $38 billion, this means the Alibaba share already represents more than 2/3rds of Yahoo's value.
The fact that such a massive percentage of Yahoo's value is Alibaba, is the reason why it continues rallying. Yahoo is a proxy for Alibaba, and the only practical way to trade Alibaba while Alibaba is not available.
Remember Twitter and GSV Capital
Something very similar happened to GSV Capital (GSVC) right into Twitter's (TWTR) IPO. GSVC had Twitter as the largest position in its fund, and that turned GSVC into the easiest way to bet on Twitter before Twitter itself was available to trade. I said this could happen in my article "GSV Capital: Large Discount To NAV With Upcoming Catalysts".
Predictably, when Twitter did in fact IPO, GSVC suddenly lost its main allure. This, too, I predicted in my article "Impact Of Twitter IPO On GSV Capital".
In short, it was both predictable that GSVC would be speculated upwards as long as Twitter was not available, and would lose its allure as soon as it was, indeed available.
How is this useful for trading Yahoo? It's useful because the situation is very similar. There are many buying Yahoo today because they can't get Alibaba, but that will change as soon as Alibaba lists.
The Yahoo Play
Knowing this, we can thus have a road map for Yahoo. It goes like this:
- Yahoo can be speculated upwards right until Alibaba IPOs (some care must be taken here in the sense that we're in the middle of a new Internet bubble, so being long these names including Yahoo has significant risk);
- However, as soon as Alibaba IPOs - maybe even in the previous day - it's advisable to sell Yahoo.