- Alibaba is conservatively worth $118 billion, making Yahoo's stake quite valuable.
- With its cash, Yahoo Japan stake and Alibaba stake, Yahoo is worth more than its current market value.
- When accounting for its profitable core business, Yahoo is trading far below fair market value, especially if Alibaba is worth more.
In How Much is Yahoo Worth Part I - A Look at Alibaba, we detailed how much Alibaba could be worth in an IPO that is expected to happen sometime after Labor Day.
We very conservatively estimated Alibaba to be worth $118 billion, (to figure out how we came up with that valuation, I strongly suggest checking out Part I, linked above). In July, Alibaba raised its valuation to $130 billion, from a previous estimate of $117 billion.
If the last few years have told us anything though, investors have been willing to pay a far higher valuation for newly public companies, as they seek out growth opportunities.
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 $)
Source: Author's chart
What else does Yahoo own?
Currently, Yahoo has a market of roughly $37 billion and its Alibaba stake could easily be worth ~$27 billion based on our conservative estimates. But even with the conservative estimate, Yahoo appears undervalued.
Yahoo doesn't just have its 22.6% stake in Alibaba. It also has its core business, a 35% stake in Yahoo Japan OTCPK:OTCPK:YAHOF OTCPK:OTCPK:YAHOY, and $2.75 billion in cash and short-term investments.
Based of the most recent closing price of Yahoo Japan (which is a publicly traded company), its market cap is worth just over $24 billion. Based on this valuation, Yahoo's 35% stake in Yahoo Japan is worth roughly $8.4 billion.
When combining Yahoo's conservatively estimated pre-tax stake in Alibaba of ~$27 billion and its stake in Yahoo Japan worth $8.4 billion, these two assets are worth almost $35.5 billion, or almost equivalent to Yahoo's current market cap of $37 billion!
Here is what we get for Yahoo's current value:
My Alibaba Conservative Estimate: $27 billion
35% stake in Yahoo Japan: $8.4 billion
Cash and short-term investments:+ $2.75 billion
So what the heck gives, why is Yahoo trading below its actual value?
Honestly, I don't know. Yahoo's current valuation stands near $37 billion, or just below the estimation above. But don't forget, Yahoo has it's core business too.
Sure, the core business may not be the most exotic business in the world and it may be struggling to grow, but it still generated a net income of $590 million in fiscal 2013.
There's no reason for investors to value the core business at $0, or in this case, a negative amount. If anything, the core business would deserve some sort of single-digit earnings multiple.
Even something as small as five times earnings would give the Yahoo core business a valuation somewhere close to $3 billion. When combined with the other assets which are valued at more than $38 billion, this pushes Yahoo's overall valuation towards $41 billion and puts the stock price close to $41, based on the outstanding share count of 994.5 million shares.
The final takeaway
There is certainly a disconnect here. Investors have no reason to value the core business at a negative value, even if its outlook is unclear and growth is stagnant. It's still profitable. Yahoo Japan is already public, and thus has a valuation we can use.
Investors may be worried about what Yahoo CEO Marissa Mayer will do with the proceeds from the Alibaba IPO. But is that enough of a worry to discount the stock by so much?
I don't think so. This could also be the market's way of saying that Alibaba is simply not worth the amount analysts think it is. But we did the math. We looked at its revenues, net income and growth rates (in Part I). We applied a conservative valuation to Alibaba and concluded with a reasonable valuation.
And remember, we are using a very conservative estimate - one that is even below the lowest analyst's estimate of $136 billion - and below the company's own estimate of $130 billion. In other words, Yahoo's stake could very easily be worth more than we are estimating.
(If we use analysts' average estimate of $168 billion, giving Yahoo a pre-tax stake worth almost $38 billion, and combine it with the other valuations from above, we come up a market cap totaling about $52 billion before taxes are taken into consideration. This would translate to a stock price of roughly $52).
The market is clearly discounting something - perhaps just fear over Alibaba's valuation - leading to a disconnect in the stock price. Disconnects lead to discounts, and discounts lead to opportunities for investors.
Right now, investors in Yahoo are looking at a limited downside, potentially plenty of upside opportunity in the stock.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.