Avoid Yahoo Stock, Buy Alibaba Instead (YHOO, BABA)

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Most would agree that the goal of a investing is rather straightforward: Investors purchase an equity with the hope that it increases at a higher rate than the S&P 500 (because if your goal isn’t to beat the S&P 500 than you should just buy index funds and save yourself a lot of time and energy), or that it provides above average income through dividends. Simple enough.Avoid Yahoo Stock, Buy Alibaba Instead (YHOO, BABA)

The definition gets murkier when it comes to stocks to avoid: It’s not just as easy as determining whether or not a stock is going to lose value, there are other considerations to think about.

For instance, there’s the possibility the stock trades flat for an extended period. And with limited investment assets, a zero return investment is costing you money if other options were available.

A stock with upward momentum, but trailing that of the major indices means you would have been better off putting your money to work elsewhere

With that all in mind, today we are going to take a look at Yahoo! Inc. (YHOO) and why it is on the list of stocks to avoid.

No Bang, Just BABA

Yahoo’s current $30.65 price tag at Monday’s open equates to a $28.61 billion market capitalization. YHOO also currently owns 15% of Chinese e-commerce company Alibaba (BABA), a stake equaling about $30 billion, or more than YHOO’s entire market value. Furthermore, YHOO recently announced that it wouldn’t be splitting off the BABA stock, but would instead sell some of its core business units, such as advertising, search technology, Yahoo Sports and Tumblr.

The proposed possible plan for Yahoo stock is being referred to as a reverse spinoff since YHOO’s core businesses will be split off while the remaining business will have the BABA stock. From an estimate and valuation standpoint, selling its core business and splitting the company up makes sense considering the BABA stake is worth $30 billion, Yahoo’s 35% stake in Yahoo Japan is worth $7 billion and its core business is worth somewhere between $2 and $8 billion.

Splitting Yahoo stock into a few different companies or just selling parts of the business should unlock value for shareholders, but there are a few “ifs” in that thesis.

First, what if no one else wants to pay between $2 and $8 billion for Yahoo’s core business’s? Its search and display advertising only account for about 5% of the global market share. Alphabet (GOOG, GOOGL) and Facebook (FB) are taking market share rapidly and Yahoo is by no means prepared to defend the little percent it still holds.

Yahoo also was once the clear cut dominate leader when it came to fantasy sports. But with the rise of the daily sites such as Draft Kings and FanDuel, Yahoo is again watching its market share rapidly deteriorate without attempts to defend its turf.

Yahoo paid $1.1 billion for Tumblr a few years ago, but honestly the platform hasn’t really taken off. At this point Yahoo may be lucky to get even $1 billion for the Tumblr platform.

Yahoo also has the 35% joint venture of Yahoo Japan, which it owns with the Japanese Internet company SoftBank (SFTBY), who owns 36% of the company. The issue with Yahoo Japan is that Yahoo made the announcement back in April of 2015 that it was looking into selling its stake and eight months later, still nothing.

This would lead some to believe that there aren’t any buyers of Yahoo Japan, or for at least not at the price Yahoo is hoping to fetch. Then there’s Yahoo’s tax implications: The reason YHOO backed off selling its BABA stock was because of the large tax bill the company would have owed. The same situation could happen with the Yahoo Japan stake.

We Have Billions of Dollars, What Should We Do With It?

I don’t believe Yahoo will be able to sell all of its current business units for top dollar considering the terrible job the company has done protecting its market share. But for arguments sake let’s say it gets a few or even the full $15 billion some estimate it could receive. As an owner of Yahoo stock, now you would have to worry about what Marissa Mayer and the rest of the YHOO executive team will do with the money.

How about another multimillion dollar party in San Francisco for more than 4 thousand people, free iPhones for all of Yahoo’s 11,000 plus employees, trips to Davos, free JawBone Ups for Yahoo employees or a few more wasteful acquisitions. Since taking over, Mayer has spent more than $2.8 billion on acquisitions, which none of which have worked out.

Final thought on Yahoo Stock

As it all sits today, it looks unlikely Yahoo will receive the $15 billion-some estimate for its core units and Yahoo Japan; but regardless of the amount it can shed assets at, based on past performance investors shouldn’t expect Yahoo stock to start paying a dividend or spending it wisely.

The only asset holding Yahoo stock at $33 per share is the BABA stake. and if you want to own a piece of Alibaba, just go buy its stock directly.

If Yahoo as we know it is broken apart, it is hard to see a clear scenario where YHOO stock holders beat the market over the long term. Avoid Yahoo stock.

As of this writing, Matt Thalman did not own shares of any company mentioned. Follow him on Twitter at @mthalman5513.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/yahoo-stock-price-yhoo/.

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