At its current stock price of $15.34 Yahoo (YHOO) has a market capitalization of $18.6 billion and an enterprise value of $16.1 billion.
The sum-of-the-parts valuation of Yahoo implies that the core business is being valued at next to nothing. A quick summary of this argument is as follows:
Value Per Yahoo Share
Value Per Yahoo Share (Post Tax Leakage)
34.75% Interest in Yahoo! Japan
42% Interest in Alibaba (assuming $35 billion valuation)
Current Stock Price
Implied Value of Core Business
This analysis implies that the core Yahoo business is only worth $1.87 per share or $2.3 billion.
However, in the last 12 months Yahoo's core business has generated $1.6 billion of EBITDA and over $875 million of free cash flow. The sum-of-the-parts analysis implies that the core business is being valued at only 1.4x EBITDA.
A comparison to a comparable company further supports the thesis that Yahoo's core business is severely undervalued. AOL (AOL), which I would argue has a less attractive business, is trading at 3.4x LTM EBITDA excluding the $1.1 billion of proceeds from its patent sale to Microsoft. If Yahoo's core business were valued at the AOL multiple of 3.4x it would be worth $4.63 per share bringing Yahoo's total value to $18.09, an 18% premium to the current price. But Yahoo is a much better business than AOL. Created at 5.0x EBITDA Yahoo's core business would be worth $6.81 per share, implying a total value for Yahoo of $20.27, a 32% premium to the current stock price.
Further, this valuation is conservative. First, there is upside to the Alibaba valuation. The numbers used above represent a floor valuation. Second, given recent events around Yahoo's leadership the company appears to have a focused involved board of directors for the first time in recent memory that is committed to realizing the value of Yahoo's core business. Third, a discounted cash flow analysis that assumes that Yahoo's free cash flow declines at 5% per year forever using a 10% discount rate values the core business at $4.36/share, a 128% premium to the $1.87 value implied by the sum-of-the-parts valuation.
Discounted Cash Flow Valuation:
Yahoo has undergone an incredible amount of change in 2012 and in the aggregate, Yahoo's prospects appear much brighter than they did last year.
Let's summarize what Yahoo has done recently:
· Named Fred Amoroso Chairman and appointed Ross Levinsohn as Interim CEO after Scott Thompson's resignation
· Ended the proxy fight with activist investor Third Point by appointing several of this board nominees including Third Point's founder Dan Loeb
· Entered into an agreement with Alibaba for the sequenced sale of Yahoo's stake back to Alibaba.
· Entered into a strategic content, programming, and distribution alliance with CNBC
· Launched Yahoo Axis, an innovative internet browser made specifically for the mobile age
While some of these events are more significant than others, and only time will tell if Yahoo is able to meaningfully grow its core business it does signify a massive shift to innovation that has been sorely lacking in Yahoo for years.
There are also some potential short-term catalysts for Yahoo. There have been rumors that new management is in the process of settling the litigation with Facebook regarding patent infringement. Second, with the Alibaba deal done Yahoo will like turn its attention back to trying to monetizing its stake in Yahoo! Japan. The analysis above assumed Yahoo's full taxes on proceeds from the monetization of Yahoo! Japan. If a deal can be structured in a more tax efficient way it would be additive to the valuation.
Despite all of these positive steps Yahoo's stock price is still down 4.9% this year.
In summary, even if Yahoo cannot become the internet giant it once was, it is sill significantly undervalued.
Disclosure: I am long YHOO.