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Emerging Markets – The Alibaba IPO Is A Winner!

Yahoo's Q1 earnings report was a game changer and I had accumulated long positions in the 32 - 33 range to position for it. This was not due to any innate enthusiasm for the portal's turnaround prospects under CEO Marissa Mayer (though I concede the portal is valued for nothing on Wall Street), but because I knew the world was waiting for its first peek into the latest financial metrics of Alibaba, arguably destined to be history's hottest internet IPO since I recommended Google in the 2004. The Alibaba IPO, which files it F-1 with the SEC next week, will be an epic event in New York's financial markets. Alibaba's revenue, profit and growth mesmerized me and every other holder of Yahoo shares since it soared to 37.50 high. Alibaba could well deliver $20 billion in revenues and $10 billion in profits by 2016. A Chinese E-commerce colossus with a 30% growth rate that is also a mobile advertising money gusher can easily command a $270 - 300 billion valuation two years from now.

The Street equity new issue grapevine argues that the Alibaba IPO will break syndicate at $150 billion. So it did not require the mathematical genius of Albert Einstein to figure out that Yahoo's 24% stake in Alibaba was valued at only $110 - 120 billion when Yahoo traded at 32 - 33. This is no risk money making arbitrage was available to every investor in the world if they only knew where to look. Sadly, in life, as in the markets, there are none so blind as those who refuse to see.

The Alibaba IPO is a no brainer, even though I am often scared about the accounting mumbo jumbo behind Chinese (actually EM!) accounting and the People's Republic digital Bamboo Curtain. Ordinarily, I would avoid a Chinese IPO like the bubonic plague. However, Alibaba is the fastest growth E-commerce business on earth. In the last quarter alone, Alibaba earned a net income of $1.36 billion (112% growth) on a revenue base of $3.1 billion (66% growth). So Alibaba, in real time, will earn $3.5 billion in 2013 with a revenue growth rate of 60% and a dominant E-commerce share in the world's most populous nation.

So back to Yahoo. AOL under Tim Armstrong taught me that a celebrity CEO (Marissa is far more glam that poor Tim), a credible turnaround and accelerated stock buybacks can make a company's shares soar. This is exactly what happened to Yahoo in the past year. The momentum is finally back in both display and search advertising, even before the sizzle value of the Alibaba IPO. Yahoo Japan also has upside from Abenomics.

I hear the CEO's of a dozen investment banks have jetted to Hong Kong to knowhow to the new Dragon Emperor Jack Ma for the privilege of underwriting the Alibaba IPO. Yummy. This means Yahoo's stake is worth at least $17 a share plus $8 per share sold in the IPO. Remove Alibaba/Japan, Marissa Mayer trades at 2 times forward EBITD, compared to Google's 17 times or even AOL's 8 times. Do the math. Few investors in the UAE have the contracts or scale to get an Alibaba IPO allotment. So they will make squat on the largest Net IPO since Facebook. My entire Chinese vocabulary is exhausted with the words "chow mein" and "chop suey" so it saddens me that the captain and kings of Wall Street will freeze out most Gulf investors from one of history's most successful flotation. So it is futile to turn cartwheels before banking taipans in Hong Kong to plead for shares.

Alibaba is China's Amazon, eBay, Paypal and even Google. It revolutionized business in the Magic (sorry, Middle!) Kingdom. Could Yahoo's $20 billion windfall even make it the target of a corporate raider? Will Icahn or Ackman take a crack at Yahoo? I have seen Yahoo shares at $120 during the tech bubble in late 1999 and Yahoo shares at $5 after 9/11. Yahoo was $9 and change just after Lehman, remember. The last decade was ten "annus horribilis". My call? "Open Sesame" is the password to buy Yahoo at 35 for a 45 target.