Yahoo (Nasdaq:YHOO) has made many mistakes over the years, especially its rejection of a $47.5 billion buyout offer from Microsoft (Nasdaq:MSFT). Yet the company has shown some savvy with its ventures in Asia. Back in 2005, the company invested $1 billion in the Chinese e-commerce operator, Alibaba. Now it looks like its 40% stake is worth $12 billion, according to media reports that suggest Yahoo is considering the sale of its Asian assets.
Then there is Yahoo Japan, which has been another home run. Yahoo’s stake could get between $5 billion and $6 billion in a sale.
And let’s not forget the company has $2 billion in its bank account.
Adding it all up, we get the following:
| Market Cap | $20B |
| Value of the Asian assets | $17B |
| Cash balance | $2B |
| Difference between the market cap and asset value | $1B |
If Yahoo Japan could fetch $6 billion, which seems reasonable, then Yahoo’s core operating business is actually worthless.
How can this be possible?
As we’ve seen this year, distressed tech companies can trade at incredibly low valuations. This is certainly the case with Research In Motion (Nasdaq:RIMM), which has a price-to-earnings multiple of 3.
In today’s brutal global markets, a tech company can easily lose its edge – and it can be tough to make a comeback. Even though Yahoo has 700 million users, the company lacks a strong presence in key growth markets, like mobile and social networking.
Of course, Facebook remains the biggest threat as it continues to gain a larger share of the online display ad market. With a likely Facebook IPO next year, this is likely to accelerate.
But does this mean the core Yahoo business deserves a value of zero? Extreme as that is, it’s likely the result of uncertainty about how much shareholders would get with a dividend – as well as the amount of a share buyback. There are some complex tax issues as well.
Yet Yahoo still generates pretax earnings of $1.2 billion. So with a multiple of 2, the company should be worth at least $2.4 billion. And Yahoo’s board is highly motivated to get short-term value for shareholders.
In other words, it’s a good bet there’s more upside on Yahoo’s stock.
Tom Taulli runs the InvestorPlace blog “IPOPlaybook
,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.
