It’s a good thing Yahoo (YHOO) has been able to ride the unprecedented success of Chinese e-commerce giant Alibaba (BABA) in recent years, because Alibaba is a far more compelling investment than Yahoo is on its own merits.
That’s probably why Yahoo announced in an SEC filing yesterday that it’s entered a one-year lock-up agreement with Alibaba whereby Yahoo maintains its 15% holding in Alibaba for at least another year.
The news, dropped casually in the 8-K filing yesterday in a one-sentence blurb, almost came off as an afterthought. After four full paragraphs replete with legalese and large numbers, the meat of the filing is glossed over quickly:
“Further in connection with the IPO, Yahoo entered into a lock-up agreement with the Underwriters restricting the sale of its remaining ordinary shares of Alibaba for a period of one year, subject to certain exceptions.”
That’s pretty awesome news for Yahoo shareholders, because it essentially gives YHOO stock a floor, at least for the next year. Yahoo owns 383.6 million shares of Alibaba, which, if BABA stock trades sideways for the next 52 weeks, is worth nearly $34 billion. Considering Yahoo’s market capitalization is currently just under $40 billion, YHOO finds itself comfortably insulated from any precipitous crashes in the near-term (at least if BABA itself doesn’t plummet).
Insulation is nice, because the future of Yahoo as a search engine is frankly pretty bleak. According to comScore, Yahoo commanded a meager 10% of the U.S. search engine market share in August, a figure that has been steadily declining at the expense of Google (GOOG) and Microsoft‘s (MSFT) Bing over the years. Check out the performance for yourself:
Of course, Yahoo is also a content company, so it’s not fair to grade its non-BABA biz purely on its search prowess alone. From news to finance to fantasy sports to e-mail and beyond, Yahoo itself remains pretty darn relevant.
And if “pretty darn relevant” is all you require of a company in order to consider purchasing its stock, YHOO has met your requirements. I wish you luck generating solid returns with those standards.
It’s a smart move for Yahoo and its shareholders to cling to its golden goose, Alibaba. But I must implore investors not to buy into YHOO stock on the merits of its Alibaba exposure alone.
There’s a purer play on Alibaba’s business now, and it’s simply BABA stock itself.
So, even though Yahoo acted in the best interest of its shareholders with yesterday’s lock-up agreement, Yahoo bulls should get used to justifying their optimism as if it were already the post-Alibaba era.
As of this writing, John Divine did not own a position in any of the stocks named here.
