YHOO: Without Alibaba, There’s Not Much to Like About Yahoo Stock

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Yahoo! Inc. (NASDAQ:YHOO) is one of those companies people like to think of as unassailable because it has an impressive pedigree. And I guess that’s understandable. After all, there was a time when Yahoo reigned as king of the search engine, its share price climbing north of $100.

YHOO: Without Alibaba, There's Not Much to Like About Yahoo StockBut like a beleaguered monarch struggling to maintain his grip on the throne, Yahoo’s days of greatness appear to be behind it.

Here are some reasons why I think YHOO stock will never again reach the levels of its glory days.

YHOO Is Parting Ways with Alibaba

Once rivals, Yahoo and Alibaba Group Holding Ltd (NYSE:BABA) have been in a sometimes tumultuous relationship since 2005. It was then that YHOO bought a 40% stake in BABA for $1 billion, creating a union that both companies thought would put them in a better position to rival eBay Inc (NASDAQ:EBAY) in China.

As time went on, investors began to understand that Alibaba was the stronger player and Yahoo the weaker, so YHOO sold about half of its stake back in 2012. The company sold an additional 140 million shares after BABA stock went public last year, leaving it with a 15% stake in Alibaba.

Now to save billions in taxes, YHOO plans to spin off its $32 billion stake in Alibaba in the fourth quarter of this year, forming an independent company called SpinCo. (However, Yahoo will keep its $7 billion stake in Yahoo Japan.)

Still, a big part of Yahoo’s growth was tied to Alibaba. What will YHOO do without its meal ticket?

YHOO Is Worth Less than You Think

Well, perhaps a better question to ask is, “What is Yahoo really worth?”

The answer? Not much, according to Yahoo shareholder Eric Jackson.

Jackson explains the math in this Business Insider report, but in short, he calculates that YHOO is only earning $190 million in earnings before interest, taxes, depreciation and amortization. Although analysts believe Yahoo will earn $1.1 billion, Jackson says that number represents “temporary high-margin revenue,” not Yahoo’s core business.

That $190 million in EBITDA would put Yahoo on the same level as AOL, Inc. (NYSE:AOL).

Part of the problem is Yahoo’s bread and butter: search.

Traffic to Yahoo’s search engine has long been in decline, and recent figures don’t add any optimism.

In February, Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) led the pack, garnering 74.9% of search traffic. Microsoft Corporation’s (NASDAQ:MSFT) Bing was next with 12.5% and Yahoo third with 10.7%. The number represented a setback for YHOO, which saw improvements in January and February.

The decline should be especially disconcerting to Yahoo, considering that decline comes despite Mozilla’s decision three months ago to make YHOO the default search engine for the U.S. version of Firefox, replacing Google.

YHOO Is Cheap, but Cheap Isn’t Always Good

Yahoo has a trailing price-to-earnings ratio of less than 6 times earnings, which looks great when you compare it to Google and AOL, Inc. (NYSE:AOL) and Google, which are trading around 27 times earnings. But it’s concerning that the picture flips when looking at future earnings — YHOO is trading at 46x, vs. 18x and 17x for Google and AOL, respectively.

The only thing that changed here are the earnings expectations — namely, while Google is expected to keep growing at a healthy clip and even AOL is projected to improve earnings by double digits next year, Yahoo is looking at a big decline in its next fiscal year.

Although some say the jury is still out on Yahoo’s future, there seems to be consensus on the company facing sizable challenges ahead.

Bottom Line

In 2005, YHOO hitched its wagon to BABA in hopes of broadening its footprint but now finds itself a dependent of the company it once partnered with. In spinning off its stake in Alibaba and forming an independent company, it will have to stand on its own two feet.

And Yahoo might find that it’s too late for that.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/yhoo-yahoo-stock-alibaba-spinco/.

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