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Yahoo Earnings Flop – What Does it Mean for Alibaba IPO?

YHOO stock fades a bit, but the BABA IPO is still the biggest driver


For Yahoo (YHOO) investors, the biggest draw for a while now has been the prospect of an Alibaba IPO that could juice shares.

yahoo stockWith valuations for Alibaba (BABA) now in the ballpark of $130 billion, and with Yahoo’s stake in the Asian internet giant at about 24%, that gives the company a potential $31.2 billion in equity. Considering YHOO stock itself boasts a market cap of just around $36 billion, it’s clear the Alibaba IPO is what’s driving investors.

But still, those who have been hanging on to Yahoo stock can’t wholly ignore what’s going on with the domestic advertising business. And yesterday’s news that Yahoo earnings hit just $270 million, or 26 cents per share, in the March-June quarter was a big disappointment. Yahoo earnings are down more than 13% from $331 million, or 30 cents per share, in the same period a year earlier; revenue also fell 4% to $1.08 billion.

So what does this mean for YHOO stock and investors eagerly awaiting the Alibaba IPO?

Actually … not much.

Alibaba IPO Will Still Lift Yahoo

Thankfully, the underperformance of Yahoo does not translate to any headwinds for Alibaba — so that’s a plus.

alibaba ipoFurthermore, Yahoo! has committed to return at least 50% of the Alibaba IPO proceeds to shareholders. It’s worth noting there will be a roughly 35% t0 40% tax on the windfall, which would bring the BABA windfall down to around $18 to 20 to billion and then net out about $9 to $10 billion to shareholders. Still, that is a huge chunk of change.

And equally important is the news that the maximum number of shares Yahoo will sell at the Alibaba IPO has been reduced to 140 million. That great news, because as we’ve seen with most sexy tech IPOs the offer price is quickly surpassed by a big pop as soon as stock hits the open market and begins trading for what investors think is fair value. The more shares Yahoo can hold back, the more it can sell after that initial pop at better pricing — delivering more value to shareholders.

The big risk, of course, is that the Alibaba IPO doesn’t go off well, and then all bets are off. Equally risky is if the company pulls a Twitter (TWTR) and sees a big initial pop … followed by a big fade that erases value in the remaining YHOO stake.

Furthermore, Yahoo can “return cash” to shareholders in many different ways. If Marissa Mayer makes a bonehead acquisition or earmarks a big chunk to stock buybacks over the next few years, then shareholders are not going to respond favorably.

Of course, given the special dividend from AOL (AOL) after the 2012 sales of some key patents to Microsoft (MSFT), it seems likely that Yahoo will follow and be generous with investors. Furthermore, Yahoo initially sold part of its Alibaba stake in 2012 for $7.1 billion … and then Marissa Mayer vetoed a plan for a Yahoo special dividend and instead went on a nearly two-year acquisition spree that hasn’t budged revenue or profit.

Yahoo stock investors will get paid when Aliababa IPO comes off, make no doubt about it. The only question is when they get paid and how much — and judging by Wall Street’s continued optimism in YHOO stock, there’s a general consensus that the benefits of that payday will far outweigh the obvious troubles underlying Yahoo’s core online ad business.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

Article printed from InvestorPlace Media, http://investorplace.com/2014/07/yahoo-earnings-alibaba-ipo/.

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