Little to Like in Yahoo Without Its BABA Stake (YHOO)

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Yahoo! Inc. (NASDAQ:YHOO) finally figured out a way to dodge paying taxes on its $40 billion stake in Alibaba Group Holding Ltd (NYSE:BABA) — by spinning off its stake into a separate company. But once that company is spun off, what does YHOO have left?

yhooLook at Yahoo’s market cap. All but $5 billion of the company’s market value is derived from its stake in Alibaba.

Once Yahoo’s Alibaba stock belongs to an investment vehicle expressly created for tax purposes, the only reason for any investor to hold Yahoo stock will be … Yahoo?

Eventually, BABA will almost certainly buy this company spun off from Yahoo, and shareholders in the company will get cash for their Alibaba stock without anyone paying a $16 billion tax bill. It’s a tax dodge, but it’s legal, so there it is.

Yahoo stock is popping in the news of the Alibaba stock spinoff because investors want in on the deal, not because they want YHOO. And they’ll have ample incentives to sell their YHOO shares once they receive their part in the company that will own the Alibaba stock. It’s a way to keep BABA while ditching YHOO.

Let’s be honest: BABA is the only reason why many investors hold YHOO in the first place.

Indeed, without its investment in Alibaba, YHOO becomes a bet on a bunch of things that aren’t much working, regardless of how much money Yahoo pumps into them. Just look at quarterly results.

Top Line Weakness at YHOO

Revenue excluding commissions actually declined 2%. The display ad business has now shrunk in eight of the last nine quarters. The only bright spot is mobile, where YHOO is doing a credible job of playing catch-up. Sales of mobile ads rose nearly 25% in the most recent quarter and now account for a fifth of Yahoo’s total revenue.

Yahoo still has a long way to go with mobile, mind you. Companies like Facebook Inc (NASDAQ:FB) and Google Inc (GOOGL) (GOOG) — you know, successful companies — derive more than half their revenue from mobile. It’s not like those guys are just standing still, and YHOO still needs to more than double its contribution from mobile just to be in their league.

The problem is that, without its BABA holdings, Yahoo is bet on investments in things like mobile, social and video … and with the exception of the gains in mobile, those things still haven’t taken off.

That makes Yahoo without its Alibaba stock look like AOL, Inc. (NYSE:AOL) — a company with a market cap of less than $4 billion and a stagnant share price. (AOL is actually negative over the last 52 weeks.)

So, by all means, enjoy the action in Yahoo stock as the spin off of its Alibaba stock draws near. If nothing else, YHOO has a floor under it as long as investors are getting in so they can get out with a chunk of Alibaba.

But once the spinoff is consummated, a giant source of demand for YHOO stock will go poof. After that, a stake in YHOO is a bet on the company returning to its former glory.

Just remember that there are precious few examples of that ever happening in the annals of corporate history, and it has pretty much never happened with an internet player like Yahoo.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/yahoo-baba-yhoo-alibaba/.

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