Yahoo! Inc. (YHOO) has long been just an arbitrage play, where investors in YHOO stock are adding up its constituent parts and presuming the total valuation of those units is worth more than the whole. The company’s stakes in both Yahoo! Japan (a separate corporate entity) and Alibaba (BABA) plus its cash holdings should equal more than the $30 billion market cap of Yahoo stock according to some people’s math.
So … YHOO is a sure thing then, right?
Wrong. Because Yahoo’s plans to unload its remaining shares in Alibaba are now very much in doubt after the firm dropped its initial request for a tax-free spinoff after the Internal Revenue Service looked poorly on the deal.
That’s a huge development, because the value of its remaining stake could be cut roughly in half if Yahoo has to pay taxes on the gains for its Alibaba sale.
Adding insult to injury, BABA stock has taken it on the chin in recent months as the Chinese stock market has melted down. In fact, if the company would have actually sold the remaining shares of Alibaba in spring and suffered the taxes — something YHOO was indeed debating internally — the company would have made as much as the tax-free deal at current valuations.
And if the tax ruling sticks, Yahoo will make even less.
More Problems at Yahoo
The loss of billions in market value for YHOO stock over the last few months is directly attributable to the troubles with this Alibaba stake; Yahoo is down about 30% in three months.
But the real problem is that going forward, Yahoo doesn’t really have a Plan B. Its domestic Internet business is incredibly challenged in an age of deflating digital advertising, and CEO Marissa Mayer has presided over slow and steady declines in both the top and bottom lines since taking over in 2012.
Mayer has, on the other hand, alienated lots of Yahoo staff through moves like killing telecommuting and recently firing people in a slow and painful manner to streamline operations. She’s also spent big on boondoggles that have failed to pay off, including the $1.1 billion acquisition of Tumblr in 2013 that has failed to yield any real revenue or profits for its new parent.
It’s about time for this company to either turn around or roll over, and sadly the challenges facing Yahoo seem to indicate the latter is more likely.
YHOO is burning cash in a quest to figure out its next move. And while it recently saw a small uptick in advertising rates, that comes after four straight quarters of a declining ad business.
Yahoo is an aging internet portal that is seeing smaller ad rates and fewer users by the day.
Investors who only bought in because of hopes of an Alibaba payday are now headed for the exit, and the downward trend seems too much for YHOO stock to overcome.
There is no light at the end of the tunnel for this fallen dot-com stock. Don’t expect a bounce, and give up on Yahoo now.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
