Yahoo: Unlocking Value

| About: Yahoo! Inc. (YHOO)


Yahoo's stock has offered tremendous returns over the past two years.

The IPO market cap of Alibaba will greatly affect Yahoo's share price.

Yahoo's future greatly depends on what it does with its cash and recent acquisitions.

There is no denying that Yahoo's (NASDAQ:YHOO) stock has performed magnificently over the past two years. Twenty-four months ago, Yahoo's stock was trading in the $15 range. Today, Yahoo is trading in the $35 range, which represents a 117% gain. While the gain has been a tremendous one, there is reason to believe that further gains may be in store.

Yahoo has been a very popular stock recently and this is in large part thanks to its 23% ownership of the behemoth Chinese online retailer Alibaba. Back in 2005, Yahoo bought a 40% stake in Alibaba for $1 billion and subsequently sold slightly less than half of its stake in 2012 for $7.6 billion, providing a hefty return. On May 6th, Alibaba filed for an IPO with the SEC. However, absent from this filing was the potential market cap of Alibaba. The market cap of Alibaba has been a heavily debated topic and analysts have given estimated figures ranging anywhere from $150 billion to $250 billion. The potential IPO price is absolutely critical for Yahoo investors.

Given the fact that Yahoo is a 23% minority owner of Alibaba, this $100 billion range can be the difference of $23 billion pre-tax for Yahoo. This becomes even more significant when we take into account the fact that Yahoo's current market capitalization is approximately $35 billion. Some analyst claim that Yahoo's portion of Alibaba is already accounted into its current market cap. Let us assume that these analysts are indeed correct and that Alibaba will hit the market at the low end of analysts' projections. This will give Yahoo's minority ownership of Alibaba approximately a $24 billion value after taxes, representing nearly three-fourths of the current market cap of Yahoo. Inevitably, Yahoo will not be unloading all of its Alibaba shares on the IPO day, but they are required to sell at least 9% of its stake based on an amendment agreement reached back in 2012. This means that any increase in value Alibaba sees after its IPO, Yahoo will own a solid 14% chunk of.

In addition to Yahoo's impressive stake in Alibaba, Yahoo also owns a 35% of a valuable asset in Yahoo Japan, which they own alongside a Japanese software company Softbank (OTCPK:SFTBY), who ironically also owns a large share of Alibaba. After taxes, Yahoo's stake in Yahoo Japan is worth approximately $5.4 billion. If we add up Yahoo's potential value in Alibaba ($24B) and its current stake in Yahoo Japan ($5B) and subtract it from Yahoo's current market cap, it leaves the value of Yahoo's core business to the tune of less than $6 billion. Add on the approximate $3 billion in cash and cash equivalents and Yahoo's core business is essentially valued under $3 billion. At this valuation, Yahoo is a screaming buy with tons of untapped, underappreciated, and overlooked value.

So what exactly does Yahoo's core business consist of? Most notably, there is Yahoo itself, its ad platform and the search engine it is globally known for. Additionally, there are Yahoo's news services, sports services, and financial services. On top of that, Yahoo owns Flickr and just last year bought Tumblr for $1.1 billion. The Tumblr acquisition was the first major acquisition under the helm of Marissa Mayer as CEO which began in July 2012. Most recently, on May 14th, Yahoo bought Blink for an undisclosed amount. Interestingly enough, Yahoo immediately shuttered and stopped running the Snapchat rival mobile messaging app. Some question why Yahoo would purchase Blink just to shut it down, but others allude to the fact that Yahoo bought Blink solely for its impressive employees, entrepreneurial spirit, and the fact that it wanted to add value to its own development team. Just one week later, on May 21st, it was reported that Yahoo was extremely close to finalizing a deal for RayV, a video streaming start-up which offers high definition online video streaming. RayV is based in Los Angeles and has research and development operations in Tel Aviv. Yahoo hopes that RayV will help bolster its own video service platform. Yahoo seems to be on a purchasing spree and some hypothesize that these recent acquisitions are to help spearhead future developments Yahoo may be working on or planning on bringing to the forefront.

It is clear that since Marissa Mayer took the helm in 2012 she has been on a buying frenzy. If indeed these acquisitions prove to be minimally successful or even a fraction of the success of its Alibaba purchase, Yahoo may be in better shape than anyone realizes. However, many point out that that's about all that Ms. Mayer has accomplished in her tenure. Yahoo's core business itself has grown very minimally. Yahoo's ad sales minus commissions were $853 million, up 2% from two years ago. EBITDA for fiscal 2013 was $887M. On top of that, Yahoo's earnings per share slipped to $1.26 versus $3.28 in the year prior. However, this year the market expects an uptick in earnings to the tune of $1.64 per share. Not too shabby for a company whose core business has the potential to be valued at essentially worthless after the Alibaba IPO.

What's in store for the future of Yahoo? Will Marissa Mayer turn the core business of Yahoo around? What will Yahoo do with the proceeds it receives from the Alibaba IPO sale? Truthfully, these are all mysteries. However, if Marissa Mayer and company can manage to make progression with the core business and make the right decisions and investments with the hoard of cash it will be sitting on, one has to imagine Yahoo's stock value will see a worthy increase. While most of the acquisitions under Marissa Mayer are just too recent to really show whether they'll pay off, I believe that Yahoo will continue to make meaningful acquisitions and eventually they will make another genius acquisition like they did in 2005 when they purchased 40% of Alibaba for just $1 billion. If you believe Yahoo is capable of turning the lump of cash it will receive into valuable assets then you would be a fool to not buy Yahoo at its current valuation.

Disclosure: I am long YHOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.