Yahoo Stock: Is YHOO Worth Nothing Without BABA?


I recall when Yahoo (YHOO) went public in 1996. There was furious trading. I got some shares and sold them months later for a profit. It was the first big Internet stock. Now, almost 20 years later, Yahoo is almost an anachronism.

Yahoo Stock: Is YHOO Worth More Than Its BABA Stake?There is frankly not much reason for Yahoo to exist, other than the fact that a lot of people have adopted it for one reason or another. I only use it for stock quotes and headlines.

However, because Yahoo owns this piece of Alibaba (BABA), everyone is trying to peg a valuation on both YHOO and BABA, separately and together.

So let’s see if we can make some kind of determination, because it is entirely possible that the market is valuing Yahoo’s core business at zero … which means it’s a value play.

Valuing BABA is difficult because the IRS, in its infinite wisdom, refused to say if the spinoff will be taxed or not. This drives me crazy, considering John Malone of Liberty Media (LMCA) seems to do it all the time.

Everyone thought the spinoff would be tax-free, and it still might be, which means the stake is worth $23 billion.

Valuing Yahoo Stock

As it trades now, Yahoo stock at $31 per share is valued at $29.2 billion. That means it’s core business is valued at $6.2 billion. Ah, but wait, here’s where it gets fun. It also has $6.8 billion in net cash! The implication is that its core business is therefore worth … zero.

What the heck? Could that be right? Yes, it is.

It’s a weird thing, given that the business produces about $500 million or so in free cash flow. If I owned a business generating that much money in free cash flow each year but somebody told me they’d pay me zero for it, I’d be furious. Wait! There’s more. Yahoo stock Japan is worth about $7 billion.

What the heck? Could that be right? Yes, it is.

Basically, the market is saying that Yahoo stock is worth less than zero. That’s just crazy. But might it be true? You have to look at several other factors.

Certainly we know that about $7 per share is wrapped in Yahoo Japan, and around $6 is in cash, meaning it is worth at least $12.60.

Next, there’s the question of whether BABA stock is overvalued or fairly valued, and if Yahoo will pay taxes of up to 40% on its stake or not. If BABA is fairly valued, then add $24 per share, and you get $37 per share in true Yahoo stock value. Even here at $31 then, it is undervalued.

But let’s say the full value also gets fully taxed at 40%. Kiss $12 billion goodbye, or $12 per share and, surprise surprise, you end up with $25 per share valuation for Yahoo which is below where it trades. That seems to be one message the market is sending — although that still doesn’t account for the core business.

But what if BABA is worth 50% of its present value, and that not only doesn’t arrive in a market valuation for awhile, but it is also taxed at 40% in the meantime at its full value? Then it’s worth $7 billion, and Yahoo shares are worth $17 at a minimum.

Where do I stand on the matter? I say Yahoo Japan is worth $7. The cash is worth closer to $6. The core business generating $550 million in free cash flow at this time, with Yahoo’s brand is worth at least $5.50, or about 10 times free cash flow, which is not an unreasonable valuation. That gets us to $19.50 per share.

I say Alibaba, which had $3.89 billion in net income in its last fiscal year should not be trading at 41 times earnings. It should be trading at 25 times earnings which is the long-term analyst growth rate projections.

That means it should be trading at a valuation about 40% less than what it is, making Yahoo’s share worth $18 billion, or about $18 per share.

That gives us fair value for Yahoo at $37.50.

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

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