Much of the value of Yahoo! Inc. (YHOO) comes from its equity stakes in the Alibaba Group and Yahoo Japan Corporation (OTCPK:YAHOY). In a previous article I discussed the state of Alibaba's IPO, what investors should expect and how I estimated the value of the existing Alibaba Group. In this article, I will discuss the impact of Alibaba's IPO and other factors on the value of Yahoo's stock.
Yahoo's Stock Is Very Overvalued Based on Its Core Businesses
As part of my valuation of Alibaba, I regressed the Price to Trailing 12 Months [TTM] Sales [P/S], Price/Book Value of Equity [P/BVE] and Price/Book Value of Assets [P/BVA] for nine comparable firms including Yahoo. The specific regression variables chosen represented growth, profitability and risk. For P/S, I used TTM sales growth, net margin and beta. For P/BVE, I used TTM sales growth, ROE and beta and for P/BVA, TTM sales growth, ROA and beta. All data were as of February 14, 2014.
These regressions resulted in models for predicting these multiples. My predictions for Yahoo are listed below:
Price/BV of Equity
Price/BV of Assets
Not surprisingly, Yahoo is overvalued based on every metric. That's because the prediction is based only on Yahoo's core businesses and its share price benefits from its stakes in Alibaba and Yahoo Japan.
The Ownership Transfer of Alipay Has Reduced the Value of Alibaba
Ownership of Alipay was transferred from the Alibaba Group to a private company controlled by Jack Ma in August 2010. Beginning in Q1 2011, Alipay's results were no longer included in Alibaba's consolidated results.
As compensation, the parties agreed the Alibaba Group would receive 37.5% of the proceeds of any liquidity event involving Alipay, such as an IPO, with a floor of $2 billion and a ceiling of $6 billion.
How Important Is Alipay?
Reuters says Alipay handled $148 billion in transactions in 2013.
If both reports are accurate, they would suggest a substantial decline in Alipay's revenues year-over-year. This is certainly possible because of competition from TenPay which started up in late 2012.
Alipay charges transaction fees ranging from 0.7-1.0% for Chinese firms and from 2.5-3% for foreign firms. Assuming the average fee was 1%, Alipay's 2013 sales were $1.48 billion. Were it still part of Alibaba, my estimate of Alibaba would increase to $133.4 billion from $119 billion.
What Will Yahoo Get from Alibaba's IPO?
As I said in my earlier article, Alibaba is planning 3 IPOs and I expect the first to be worth $35-40 billion. So, Yahoo's gross proceeds for its 10% will be $3.5-4.0 billion.
The value of Yahoo's remaining 14% stake will depend on how Alibaba's stock performs after the IPO.
Yahoo's Value as the Sum of the Parts
1. Estimate of Yahoo's Core Equity Value
To get an estimate of the value of Yahoo's core businesses, I did a quick discounted cash flow analysis. I estimated its cost of equity at 10.48%, used 2.74% for the risk free rate and 24.2% for its tax rate in perpetuity. Shares outstanding were 1010.21 million.
I started with base adjusted net operating earnings of $543.7 million. I increased Yahoo's reported operating income from $589.9 million to $717.3 million by adding back $63.6 million in goodwill impairment and capitalizing its product development expense which increased its EBIT by another $63.8 million. Applying a tax rate of 24.2%, I obtained base year earnings of $543.7 million.
I looked at two scenarios:
- Adjusted earnings grow 6% in 2014 (same as in 2013), 4% in 2015 and at the rate of the economy thereafter (which I assumed to be the same as the risk free rate). The per share equity value was $9.54.
- Adjusted earnings are flat in 2014 and 2015 and then grow at the rate of the economy thereafter. The per share equity value was $7.34.
2. Estimated Value of Yahoo Japan
- The market cap for Yahoo Japan in Tokyo was about $35.2 billion.
- Yahoo owns 35%, so its share is $12.3 billion or about $12.19/share of Yahoo stock.
3. Estimated Value of Stake in Alibaba
- IPO Proceeds: $35-40 billion
- Value per share: $3.46 to $3.96
4. Estimated Value of Remaining Stake in Alibaba
- 14% of $119 billion or $12.6 billion. Value per share: $16.49
5. Estimated Value of Payment for Alipay
- Minimum: 14% of $2 billion or $280 million. Value per share: $0.28
- Maximum: 14% of $6 billion or $840 million. Value per share: $0.83
6. The Rest as of December 31, 2013
- Cash and short-term investments: $3.41 billion. Value per share: $3.37
- Market value of debt: $1.1 billion. Value per share: -$1.05
Adding it all up,
Value of Core Businesses
Alibaba IPO Proceeds
Remaining Alibaba Stake
Share of Alipay Payment
TOTAL VALUE OF YAHOO
What Would the Estimates Be If Alipay Were Still Part of Alibaba?
- Based on Alibaba's TTM sales growth of 65%, its value with Alipay would be $133.4 billion.
- Yahoo's 14% stake after the IPO would be worth $18.27 -- $1.50 more than the low estimate and $0.95 more than the high estimate based on the difference between $18.27 and the sum of its remaining 14% stake of $16.49 plus its share of the Alipay payment.
- The low estimate for Yahoo's value would be: $43.58.
- The high estimate for Yahoo's value would be: $46.28.
- The value of Yahoo's stock is estimated at $42.08 to $45.33/share.
- The loss of Alipay cost Yahoo shareholders an estimated $0.95 to $1.50 a share.