- Yahoo shares are undervalued on a sum of the parts basis.
- The stock sold off overnight on a transitory policy change in China.
- This leaves the shares heavily undervalued if one accepts the very high value for Alibaba's IPO being reported in the Telegraph.
The general market sell-off in China that has led to profit-taking in the U.S. may be creating a short-term buying opportunity in Yahoo (NASDAQ:YHOO) shares. Here's the set-up.
London's Telegraph is reporting as follows:
New York is close to winning its tug of war with Hong Kong to become the place where Alibaba, the internet giant, goes public.
The online retailer has a relatively low profile outside its native China, but already dwarves Amazon in scale and is expected to reach a value of around $200 B by the end of this year.
If we assume a theoretical tax rate of 33% for the sale of Yahoo's 24% stake in Alibaba, which has a very low tax basis, then YHOO shareholders will functionally have claim on 16% of the IPO values of Alibaba. If Yahoo sells all its stock at the full $200 B value, which is hardly certain for various reasons, then it would have $32 B enter its coffers, or at least be valued at that amount. YHOO also has a tangible book value of $8 B and a total book value of $13 B.
Yahoo is also the parent and major shareholder in the publicly-traded subsidiary, Yahoo Japan. Its stake is valued at $12/share, which is $12 B pre-tax given 1.0 B YHOO (parent) shares outstanding. Call it $8 B after-tax.
So simply adding a theoretical after-tax value for YHOO's book value and equity stakes in Alibaba and Yahoo Japan, one can get the sum of $32 B, $13 B and $8 B, which total $53 B. Meanwhile, YHOO closed Thursday with a value of $37.6 B.
The overnight news is that Yahoo was trading down about 4% in Japanese trading due to news reported by Zero Hedge affecting a company called Alipay:
The PBOC issued a statement today, according to 21st Century Business Herald, that halts virtual credit card products and "face-to-face" payment services such as QR code payment:
- *PBOC HALTS QR CODE PAYMENT: 21ST HERALD
- *PBOC HALTS VIRTUAL CREDIT CARDS BY ALIPAY, TENCENT: 21ST HERALD
Tencent is down over 5%, China CITIC is crushed, and Yahoo was dumped in morning trading in Japan (on the back of Alibaba's Alipay service being affected).
But a Seeking Alpha contributor, Pamela Peerce-Jones, estimates that Alipay has a small value, somewhere between 28 and 83 cents per share. So any notable selling in YHOO on the open in the U.S. relating to policy changes in China may allow a reasonably attractive purchase of YHOO shares.
Of course, there is no guarantee that Alibaba will even go public, or what any IPO(s) would be done at. But, based on valuations of Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN), the $200 B valuation of Alibaba is plausible. On a takeover, it is not difficult to see YHOO shares going for far more than the $53 B totaled above.
Summary: YHOO shares can win due to Alibaba's rich valuation and/or from Yahoo's profitable operational improvement if it finally occurs. As a takeover target, YHOO is a stock that investors can consider buying on weakness even if Q1 disappoints investors. A morning sell-off relating to Alipay could profit aggressive/patient investors a reasonably good entry point into YHOO, understanding many uncertainties relating to its Alibaba stake as well as to Yahoo's operational status.
Additional disclosure: Not investment advice. I am not an investment adviser.