Buying Yahoo Ahead of the Alibaba IPO

Let me preface this by saying two things: (1) This is not a typical trade for the fund as Yahoo is not the typical growth story and (2) I am no rocket scientist on this trade, many others are doing the same.

Yahoo (YHOO) in many ways is a sad tale. They have one of the most sticky sites on the internet but have failed to monetize this to a level they could of (or should of). That said, at least they brought CEO Wang back so there is some down the road. But right now I don't care much about that - I just care that Chinese investors have no concern about valuation and will be thirsting for a hot tech IPO like Alibaba.com.

While the shares will trade in Hong Kong, that market has been on fire (up >50% since August) and the time to strike is now, when anything Chinese gets a valuation metric that makes little sense. So in that sense, great timing. (who knows, this IPO might mark the near term top of this incredible run in those markets?) I don't know, nor really care what Yahoo's stake in Alibaba.com will mean in the long run - this is going to be a trade.

Yahoo owns 39% of Alibaba.com and the stock is poised to IPO at HK$13.50 on Nov 6th. Yahoo has already made a run in anticipation of this IPO, rising from $28 to $34, but when the actual price of the IPO came out, investors sold off Yahoo, and the stock is now touching $30. That's where I come in. With the stock back down to its 20 day moving average, we have a bit of a safer entry point, and downside to $28 (50 day moving average) looks like the downside of this trade.

The original IPO price makes little difference to me (did we value EMC at the original IPO price of VMWare (VMW)?) - the Chinese took a coal company up 90% on its first day, what do you think they will be doing to a premium internet company? One of the top two names in the country (along with Baidu.com) at that? I am fully confident in the Chinese ability to overvalue Alibaba.com. You will see a magnificent unholy spike, it's just a matter of degree. And how much Yahoo falls in line. I am going to see if we can get a nice 13-15% short term trade here (this would take Yahoo to $34-$34.50).

Again this is atypical of the fund's holdings which are more long term secular growers. But we have an opportunity here to take advantage of the Chinese propensity to value everything at 10x what it would be valued in the US, and a premium brand like Alibaba.com does not come along often.

I bought 800 shares near $30 for $24K. If the stock dips to $28 area pre IPO, I will buy more.

Disclosure: Long Yahoo, Baidu.com in fund; long Yahoo in personal account

Comments

[dslnbull:]

YHOO ceo sold millions and millions shares in few days. That is not a normal action. He sent wrong signal to institution community YHOO will never ever see 50 dollar in next 10 year. It might go below 20 . There is no way YHOO can compet GOOG, MSFT. CEO has no vision for future like APPLE ceo. CEO should sent home and find young ceo. ALIBABA has a lot of competition like TOOTOO.COM . ALIBABA will not turn the yahoos turn table.

2007 Nov 02 08:54 AM

[CT:]

Tader Mark... what is your opinion on the timeframe to sell? I know that it took EMC some time to finally start moving up in response to the high valuations given to VMW. Do you think YHOO will have a similar lag?

Any idea on what the original IPO price for Alibaba was and how much it has been raised since then? This would be a good indication of demand in the market for the stock and we can maybe use that to judge what the open market response will be once the stock goes live.

2007 Nov 02 10:02 AM

[TraderMark:]

CT, I wrote above its priced at HK$13.50 and will go Nov 6th. I'm not sure how oversubscribed it is, but I am sure it will be a massive demand. Remember, Baidu does not trade in HK or Shanghai so there will be a thirst for a true tech (and internet tech at that) stock - many stocks are banks, real estate plays, and industry in those markets. As for Yahoo let's see - its a trade proposal and a crowded trade. So if it doesn't work, you cut and bail. If it does work you take your profit. A lot also depends on the market moods here (and there) - if the market swings ugly in next week it will hurt the short term prospects of the trade. For me its a short term trade, I will see how it does and probably will be out within a week. But thats just me, everyone has different perspective. Again keep in mind, a lot of people are on this trade so its not as easy as something where you find something that no one else thought of - hence it might not be quite as profitable. We shall see.

To Long Short, sorry - a typo on my end. Thanks for the correction.

2007 Nov 02 12:07 PM

[northvalley:]

Yahoo!'s CEO is Jerry Yang, not Wang as you mentioned in your article. <em>(thanks -- fixed. Ed)</em>

2007 Nov 02 10:49 AM

[sidney:]

why not by 9984: jp instead? it controls ~30% of alibaba's parent company... not to mention a highly leveraged bet on private wireless vs public(ntt)

2007 Nov 04 04:12 PM