I had recommended Yahoo in the 32 - 33 range in successive columns in the past month since I am convinced Wall Street grossly undervalues its stake in China's Alibaba/Yahoo Japan and disses clear evidence of its portal turnaround.
The latest Street grapevine argues that Alibaba will launch history's biggest E-commerce flotation in August and the underwriters will price the shares at $160 billion. The issue of Alipay (Jake Ma owns the majority stake in Alipay that is worth more than his stake in Alibaba) reverting back to its parent Alibaba now that the IPO will be held in New York, not Hong Kong. Thus the issue of a foreign ownership of a Chinese financial institution will not apply to Alipay. Memories of the Facebook IPO in May 2012 make me immune to the Alibaba IPO frenzy on Wall Street. However, statistics, like Shakira's hips, don't lie. There is no other Internet company on the planet that can grow revenues at 65% and net profit at 115%, as Alibaba did in its 3Q earnings to $3 billion plus in revenues and $1.2 billion in profits. Alibaba processes 60,000 transactions a minute in the world's most populous country. It is China's Amazon, Paypal, Ebay and Google. This is unquestionably destined to be one of the world's great investment opportunities but the average investor in the Gulf have no real hope of getting a decent allocation if the deal is priced right by the syndicate desks in New York. Hence my focus on the value of Yahoo's 24% stake in the deal.
Unlike Amazon, Alibaba has stellar operating margins and hypergrowth metrics. Yet Amazon trades at a surreal 400 times earnings. If Alibaba was priced on its 2013 profit of $3.15 billion at Amazon's metrics, its market value would be $1.2 trillion and Yahoo's stake would be worth $300 a share! Absurd? Of course, but only up to a point. I believe Alibaba will trade at a Baidu valuation near 30 times earnings two years from now. So fast forward to 2016. Hilary is in the White House and Alibaba posts $10 billion in net profit and $25 billion in revenues. This means Alibaba is valued at $300 billion on Wall Street. So, despite my skeptical, contrarian DNA (Chinese accounting is hardly the Holy Grail and Chinese governance, as Dragon Emperor Jack Ma proved with Alipay, an oxymoron) I predict the Alibaba IPO will double in the next two years.
Note that Facebook and Sina, arguably both growth metric peers for Alibaba, trade at 60 - 70 times earnings valuation. So let me assign a 40 times earnings value to Alibaba implicit in Yahoo's stake. This is surely doable and logical. This means Yahoo's stake is worth $35 a share, add another $7 for Japan, $3 for cash and a niggardly $8 for Marissa Mayer's portal turnaround (remember Tim's AOL and Meg's HP as classic models of tech turnarounds). Simple math and my judgment on value leads me to believe Yahoo is worth $52 a share. I repeat. In my view, Yahoo is worth $52 a share.
The real twist in this take is the $23 billion cash Yahoo will hold as its aftertax windfall from the 40% of its Alibaba stake it is required to sell at the IPO. This cash windfall, added to the existing cash, means Yahoo will have $20 a share in cash after this decade's most frenzied global e-commerce/internet flotation. This will surely attract the benign, activist gaze of Uncle Carl or Bill Ackman. So Marissa Mayer will have no choice but to dramatically increase share buybacks. Note that the board has approved Marissa's existing $5 billion buyback program. As Yahoo's share count is slashed and the portal/Japan/Alibaba growth rates accelerate, Yahoo's book value will surge.
It is impossible to invest successfully without a vision for a company or country's future. My readers know that I am forced to act as a money market Nostradamus even though gazers of crystal balls periodically swallow crushed glass. Readers in Dubai may remember my recommendations to buy the IPO of Juno, Google, CME, Cambridge REIT and Palo Alto Networks. Price is what you pay, value is what you get. So I used momentum selling, Alipay chatter, Putin, Crimea and the Tooth Fairy to accumulate Yahoo in the early 30's. I could be wrong. But what if I am right? What then?