Seeking Alpha
Long/short equity, value, growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • Yahoo! has several valuable properties, but none as valuable as Alibaba.
  • Alibaba's valuation is currently unknown, but we can make conservative estimates.
  • Yahoo!'s stake in Alibaba could be worth more than the entire company is currently valued.

There have been many discussions trying to determine how much Yahoo! YHOO is worth based on its stake in e-commerce giant, Alibaba BABA. For my own curiosity, I had had enough. I needed to find out what shares of Yahoo! were truly worth. In an attempt to help other investors, here is what I found.

Background story

Yahoo! owns a 22.5% stake in Alibaba, according to the latter's F-1 filing, (found on page 228). Analysts' valuation of Alibaba, along with its rapid growth, suddenly pegs Yahoo!'s stake at a very valuable sum, perhaps larger than its current market cap!

Alibaba is expected to IPO later this year in the U.S., in which Yahoo! is required to sell 140 million shares of its ~523,500,000 share holding, or roughly a quarter of its 22.5% stake. So Alibaba's initial valuation is important, since Yahoo! will be a part of the IPO selling process.

The remaining ~16.5% stake in Alibaba can be held onto by Yahoo!, meaning that, as Ailbaba's valuation increases or decreases, Yahoo!'s stake will become more and less valuable over time. Here is look at the different market valuations for Alibaba and what it would it mean for Yahoo! before taxes:

Alibaba Market Cap (in billions of $)

IPO Stake (in billions of $)

Post-IPO (~16.5%) (in billions of $)

Total Value to Yahoo! (in billions of $)

$120

$7.22

$19.80

$27.02

$130

$7.82

$21.45

$29.27

$150

$9.03

$24.75

$33.78

$160

$9.63

$26.40

$36.03

$180

$10.83

$29.70

$40.53

$200

$12.03

$33.00

$45.03

$215

$12.94

$35.48

$48.41

$230

$13.84

$37.95

$51.79

$245

$14.74

$40.43

$55.17

$260

$15.64

$42.90

$58.54

Source: Author

So how much is Alibaba worth?

In February, the average analyst estimate suggested that Alibaba is worth $153 billion. In April, the latest reading, that average quickly jumped to $168 billion. Alibaba also recently announced that it is valuing itself at $130 billion.

The highest analyst estimate for Alibaba calls for a valuation of $245 billion, while the lowest estimate is $136 billion. Below is a table that I constructed of these four estimates - the low, high, current average from April, and previous average from February - to help visualize the pre-tax value to Yahoo!.

Alibaba Market Cap (in billions of $)

IPO Stake (in billions of $)

Post-IPO (~16.5%) (in billions of $)

Total Value to Yahoo! (in billions of $)

$136 (low est.)

$8.18

$22.44

$30.62

$245 (high est.)

$14.74

$40.43

$55.17

$168 (latest avg.)

$10.11

$27.72

$37.83

$153 (Feb. avg.)

$9.21

$25.25

$34.45

Source: Author

If we take the current average valuation for Alibaba, which is roughly $168 billion, then that makes Yahoo!'s full pre-tax stake worth roughly $38 billion at the time of the IPO. That's pretty astounding, considering Yahoo! only has a market cap of about $37 billion, even after the stock's recent 14% rally in the past month.

What's Alibaba's growth look like?

According to the latest F-1 filing, Alibaba is growing revenues and income extremely fast. Have a look below:

Year

Revenues (In Millions of Chinese Yuan)

Income from Operations (In Millions of Chinese Yuan)

Net Income (In Millions of Chinese Yuan)

2010

6,670

(873)

(503)

2011

11,903

1,322

1,608

2012

20,025

5,015

4,665

2013

34,517

10,751

8,649

2014

45,132

24,920

23,403

Source: table by Author, data from F-1 filing

Clearly Alibaba is growing fast and that deserves some sort of premium. Since Amazon AMZN is not profitable, and therefore, hard to value on traditional metrics, let's use Google GOOGL GOOG and eBay EBAY as comparisons.

Company

Net Income (in USD)

Market Cap (in USD)

PE Ratio

Google

$12.9 billion

$382.1 billion

31

eBay

$2.85 billion

$62.5 billion

22.6

Alibaba

$3.8 billion

Trying to figure out

Can't figure out without market cap

Source: table by Author, data from Google Finance

By taking a look at the valuation of some of Alibaba's peers, we can get an idea of what Alibaba is worth. Google has a higher valuation than eBay, because it is growing faster. On that basis, you could argue that Alibaba deserves a higher valuation than that of Google.

However, Google is a well-known, loved American brand. People know and trust it. Chinese Internet stocks don't have the same reputation. Analysts' average valuation for Alibaba at $168 billion puts it near 45 times last year's earnings.

The question is whether this valuation will be expensive based of forward growth. Many assume the company will continue to grow at a rapid pace, but that is obviously an expectation, and not a known fact.

When looking at Alibaba, it's better to be safe, than sorry

I think using a conservative valuation is the safest way of valuing this company. For instance, instead of using a PE ratio of 45 (like analysts are), let's just use Google's PE ratio of 31.

At 31 times earnings, Alibaba has a valuation of roughly $118 billion. That leaves Yahoo!'s pre-tax stake worth almost $27 billion. Keep in mind this "conservative" estimated valuation is based off of a slower growing company (Google) and is also lower than the lowest analyst estimate calling for a market cap of $136 billion and the company's own estimation of $130 billion. Hence, it's a conservative estimate.

In other words, Alibaba's valuation is likely to come in higher than this figure, but using a lower estimate will help limit our downside if it is indeed this low, while maximizing our upside if it comes in higher.

Final thoughts
My theory is this: If Alibaba starts its IPO pricing at its current estimate of $130 billion, that will hopefully put a nice floor in shares of Yahoo!. This is because a $130 billion valuation would result in a $29.43 billion pre-tax stake for Yahoo!.

Of course, it's always possible that the pricing for Alibaba gets pushed higher than the $130 billion valuation, which we've seen many times throughout the IPO process in 2013 and 2014, as investors' appetite for growth increases.

While $29.43 billion is still less than Yahoo!'s current market cap of ~$37 billion, the company has other assets and businesses that justify a higher valuation than the stock is currently worth. To me, this scenario looks like we have limited downside if we're wrong and plenty of upside if we're right. That's where using a conservative estimate helps too.

Source: How Much Is Yahoo Worth Part I: A Look At Alibaba