Yahoo Stock: Even a Stake in Alibaba Doesn’t Make YHOO a Buy

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Yahoo (YHOO) is a stock only a speculator could love. For everyone else, YHOO is a sucker’s bet.

Yahoo Stock: Even a Stake in Alibaba Doesn't Make YHOO a BuySure, Yahoo stock had a heck of a three-year run. But after peaking late last year, it has returned to usual form, and now an analyst upgrade has investors jumping in once again.

Yahoo stock was punished earlier this week after China’s e-commerce behemoth Alibaba (BABA) spooked the market with a disappointing earnings report.

That’s because Yahoo holds a large stake in BABA that it plans to spin off to shareholders later this year, so anything that hurts Alibaba hurts YHOO as well. Indeed, in less than a year, the value of Yahoo’s ownership interest in BABA has tumbled to about $28 billion from a peak of nearly $50 billion.

Be that as it may, the selloff prompted a Wall Street analyst to upgrade YHOO stock to “outperform” (a fancy word for ‘buy”). Bernstein Research reasons that the YHOO stock price already reflects a worst-case scenario. Yahoo stock duly rallied on the upgrade.

But even after making some extremely conservative assumptions (for example, YHOO winds up having to pay taxes on its BABA stake) an analyst upgrade sounds like an invitation to disappointment city.

A BABA-less Yahoo Stock Is a Loser

Although the planned fourth-quarter spin off of BABA might make Yahoo a decent trade for a few months, beyond that, YHOO stock has little going for it. Once Yahoo shareholders get their stakes in the spinoff, why should they hold on to this old-line Internet also-ran?

It’s not like the macroeconomic picture is doing Yahoo stock any favors.

After all, Yahoo still has exposure to the slowdown in China even without Alibaba. After BABA, YHOO’s biggest investment in Asia is its 35.5% ownership of Yahoo Japan. With an estimated value of $9 billion, Yahoo Japan equals a third of YHOO’s market capitalization.

China is Japan’s largest trading partner — as well as its top source of imports — which doesn’t bode well for Yahoo Japan maintaining its current worth. Anything that threatens the value of that stake gives investors another reason to sell Yahoo stock.

Furthermore, it’s not like Yahoo’s bread-and-butter domestic business has such great prospects either: Wall Street sees virtually no growth in earnings per share next year (and a major decline this year.)

The longer-term forecast for Yahoo is worse, as Thomson One Analytics calls for a sustained retreat in earnings.

And yet Yahoo stock goes for more than 50 times forward earnings. That’s far more expensive than either Google (GOOGGOOGL) or Facebook (FB).

Maybe — maybe — the BABA and Yahoo Japan stakes justifies that sort of premium, but BABA is going bye-bye. At that point, all the rump Yahoo has to offer is more weak earnings and guidance cuts.

Bottom Line for YHOO

Yahoo stock has had a nice run over the last few years, but it’s time for YHOO investors to cash in. Yahoo just doesn’t have the fundamentals or the sentiment to make it a market-beater.

Besides, if you’re really hot to get a piece of the BABA stake, you can always pick it up after the spinoff. At this point, the sputtering Chinese economy makes it a wash as to whether or not you’ll get a better price.

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/2015/08/yahoo-stock-yhoo-baba/.

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