Since reporting its earnings on April 15th, Yahoo (YHOO) has stalled between $35 and $36 a share, which puts it at a $36.8 billion market cap. The lack of post-earnings momentum is likely related to the news that Alibaba won't be filing its F-1 this week. As the stock stalls, our bullishness grows. April 15th marked an important inflection point for Alibaba, as it reported revenue growth of 66% and net income growth of 110%. Up until that report, it was perceived that Alibaba was stuck in a cycle of declining growth, and funds like the Fidelity Contrafund sold shares of YHOO in anticipation of a 'sell the news' reaction at the IPO. Prior to April 15th, the consensus expectation for Alibaba's IPO was anywhere between $80 billion and $100 billion. Such a perception got crushed when investors caught a glimpse of Alibaba's stunning growth. In a note to clients, Bernstein analyst Carlos Kirjner wrote:
Holy Alibaba! We believe these results vindicate our views that Alibaba is a highly valuable asset, worth much more than what we think was reflected in Yahoo's stock price.
Bernstein tagged Alibaba with a $245 billion valuation. Taobao has 800 million product listings from 7 million sellers who pay Alibaba for advertising and other services. Tmall reached $240 billion in total transaction volume in 2013. Bernstein expects Taobao and Tmall will deliver 2016 net income of $9.5 billion ($7.4 billion in 2015). Given a 25x multiple, these projections put total valuation at $237 billion with another $7.5 billion in valuation coming from Alipay and Alibaba's own site. Bernstein left out the fact that Alibaba also owns significant stakes in Weibo (Chinese Twitter), AutoNavi (navigation), Intime Retail (Chinese department store), and Tango (messaging app).
At a $245 billion valuation, Yahoo's 24% stake is worth $58.8 billion, 60% higher than Yahoo's current market cap. With numbers like these, Yahoo should be viewed as a hedge fund rather than an Internet advertising portal. Its two largest assets, Alibaba and Yahoo Japan, are independent entities not run by the parent company. Yahoo's 35% stake in Yahoo Japan is valued at a touch over $10 billion. Yahoo has $4 billion in cash on its own balance sheet. Those three assets alone are worth an estimated $72.8 billion, so what gives? When will this disconnect in market cap math get reconciled? Obviously core Yahoo and its stalled growth rate has pulled down the overall valuation, which means it's time to break up the assets. We expect activist investors will re-enter Yahoo prior to the Alibaba IPO. An acquisition is also possible. Alibaba might even emerge as a buyer in order to recoup the entire 24% stake.
If you apply a conservative valuation of Yahoo at $50 billion, it translates into a $45 stock price. A more accurate valuation of Yahoo is in excess of $65 billion which translates into a $58 stock price. In order for this stock rally to occur, we need a mix of Alibaba IPO hype and the presence of activist investors threatening to break up the assets. Both developments should happen sometime over the next 6 months.
The risk of Yahoo dropping significantly below our EconomicTiming.com portfolio momentum point of $35 a share is low considering the above-mentioned valuations. We're tossing around the idea of putting all of our cash allocations into YHOO's stock during this pre-IPO window, because the risk is so low. We remain laser-focused on the Yahoo opportunity and will add to positions aggressively as the stock moves up in $1 increments. The next phase of optimism should occur when the F-1 is filed.
Disclosure: I am long YHOO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.