It is a rather well established fact today that Yahoo (NASDAQ:YHOO) stock price is heavily influenced by the value of its holdings in Alibaba and Yahoo Japan. In an article in September 2013, when the company was trading at about $31 per share, we had highlighted that Yahoo stock was trading well below our estimate of it’s intrinsic value of around $43 a share.
In the 6 months that have followed, not surprisingly, the stock price has moved up 26.5% to trade at $39.63 as on the 4th of March 2014. Further, the estimated value of Alibaba’s much awaited IPO has also seen a positive shift. We review Yahoo’s current valuation to understand where its stock could go from here.
Alibaba’s Contribution To Yahoo Stock Price
In its latest quarter, Q3 2013, Alibaba continued to report inspiring numbers with staggering operating profit and net profit margins. The fact that the company’s revenue has been growing at an average of more than 60% for the last 6 years explains why analysts have been constantly revising their IPO value estimates upwards.
|Alibaba performance||Q3 2012||Q2 2013||Q3 2013|
|Revenue in Millions||$1177M||$1737M||$1776M|
*Includes 1 time royalty payment to Yahoo
After re-negotiating the terms of its stake sale during Alibaba’s IPO, when the company does go public, Yahoo will be required to sell only about 9.5% out its 24% stake in the company and will be left with a stake of 14.5%.
Expectations peg Alibaba’s IPO valuation within a broad range of $120 – 200 billion. Going by a P/E ratio of 61 that Hong Kong based Tencent holdings currently enjoys, Alibaba should be able to command a market cap greater than the average expectation of $160 billion.
Do note that while computing the value of Yahoo’s stakes in Alibaba we have considered the tax implications only on that part of Yahoo’s stake in Alibaba which it is sure to sell at the time of the IPO. The same applies to Yahoo's stake in Yahoo Japan.
|Alibaba IPO valuation||$120.0B||$140.0B||$160.0B||$180.0B||$200.0B|
|Value to YHOO with 24% stake||$28.8M||$33.6M||$38.4M||$43.2M||$48.0M|
|Post tax value of mandatory 9.5% exit*||$7.4M||$8.7M||$9.9M||$11.2M||$12.4M|
|Residual stake of 14.5%||17.4%||20.3%||23.1%||26.0%||28.9%|
|Total value of stake at Alibaba IPO||24.8%||28.9%||33.1%||37.2%||41.3%|
|Value per share||24.6||28.6||32.7||36.8||40.9|
*35% tax rate
However, the midpoint IPO valuation of about $160 billion represents a contribution of about $32.7 per share to Yahoo’s indicative stock price.
Based on expectations, the worst case and best case scenarios would add $24.6 and $40.9 per share respectively to Yahoo’s intrinsic value.
Yahoo Japan’s Share Of Yahoo Stock Price
Yahoo owns a 35% stake in Yahoo Japan which is listed in Tokyo. In terms of USD, Yahoo’s stake translates to a value of $12.03 per share.
|Yahoo Japan Valuation|
|Yahoo Japan Market Cap||$34.7B|
|Value of Yahoo's stake in Yahoo Japan||$12.15B|
|Yahoo value per share*||$12.03|
*As on Mar 04, 2014 at USD/JPY exchange rate of 102.24
Valuing Yahoo using a relative P/E could skew the result since it would include contributions of Alibaba and Yahoo Japan. That said, a PS multiple based valuation is also not easy in the case of Yahoo since most other companies like Google and Facebook have relatively robust revenue growth.
The closest comparable would be AOL which has also seen constantly declining revenues. Valuing Yahoo using AOL’s P/S multiple provides us with a value of $ 6.88 per share. Do note that this would be a very conservative valuation of Yahoo’s core business.
Yahoo Stock's Total Value Per Share
|Yahoo Valuation||Worst Case||Best Case||Midpoint|
Summing up the individual parts, Yahoo’s potential value sums up to about $51.6 per share representing an upside of about 30% from its current price of $39 a share. We have also presented the worst and best case scenarios based on current expectations. However, we expect that the eventual outcome would be closer to the midpoint.
Is Yahoo stock a buy. View the complete Yahoo stock analysis on Amigobulls.