YHOO: Yahoo Stock Isn’t Worth a Second Look

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Let’s start with the bad news about Yahoo (YHOO) stock. Thanks to Alibaba (BABA), shares of YHOO have shed more than 8% of their value since the Alibaba IPO on Friday.

yahoo stock, yhoo

The good news, for you glass-half-full folks out there, is that Yahoo stock is still up more than 24% in the past year, thanks to … well, Alibaba.

This story is hardly new, of course. But the real question, for anyone eyeing Yahoo stock, is whether you should you buy on the dip or just avoid a post-BABA IPO.

Well, Bernstein Research — which was rightfully bullish on Yahoo stock during that run-up — says the latter. The firm just downgraded YHOO from “Outperform” to “Perform,” saying the original rating was “based on a view that the full value of Alibaba was misunderstood and underestimated” and that the thesis has now played out.

Right now, shares are at just under $40 per share, but not by much. Bernstein said that, in order to buy at that level, one of two things has to happen.

Scenario A: Yahoo’s management needs to transfer the remaining Alibaba stake to Yahoo stock holders in a tax-efficient manner. The firm estimates that post-Alibaba IPO, Yahoo will own 384 million shares of the e-commerce giant. So some optimists might think that one reason to be bullish on Yahoo stock would be because you think those shares will keep climbing … right?

Well, Bernstein says not so fast. A recent report didn’t pull any punches:

“While it is possible that Alibaba’s market valuation is still low, and we could see, e.g., a 30% upside move for Alibaba in the next 12 months, which would value the company north of $300 billion, we currently don’t believe this is enough to create a compelling investment thesis for Yahoo!.”

Why? Largely because the tax treatment of the Alibaba stake is the most important factor for the value of Yahoo stock, according to Bernstein. In fact, Bernstein crunched a bunch of numbers and most scenarios put Yahoo’s price, factoring in this variable, not much higher than its current one.

The other “buy” thesis Bernstein could get on-board with? If Yahoo itself became an acquisition target … potentially from Alibaba itself. Softbank was also floated as a possibility … but don’t get your hopes up. Bernstein thinks betting on this wouldn’t be the smartest strategy. While a buy-out is possible, it certainly isn’t probable. Here it is, straight from the horse’s mouth:

“It is also possible that Alibaba or Softbank may make a bid for Yahoo! to take control of the 384 million shares of Alibaba Yahoo! controls. However, we don’t think entering the US and (to a smaller extent) the Western European display and search advertising businesses is among Alibaba’s priorities. This makes the transaction less likely in our view (although by no means does it rule it out).”

The bottom line? Yahoo stock might be a buy … but only if things go just right.

Basically, Bernstein says don’t hold your breath, and don’t buy.

As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/yhoo-yahoo-stock/.

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