- In the year-to-date, Yahoo has been punished in-line with momentum stocks like Amazon and Twitter, which have been cut off from fundamentals.
- The fact that the stock has been trading as a proxy for its Asian investments makes us feel the stock has been unduly punished in the recent tech stocks meltdown.
- The stock, post the latest pullback, is attractively positioned to give significant returns as we near the Alibaba IPO.
Yahoo (NASDAQ:YHOO), the poster boy of the 1990’s internet stock boom, has fallen behind its glory days. Considered to be one of the most famous and successful of tech companies from the internet world, today Yahoo sadly trades as a proxy for its Asian investments in Alibaba and Yahoo Japan. However, the latest correction in the stock price has led to the stock falling to its lowest levels in the last five months opening up of a potential entry point for the long investor.
Following the huge gains of 2013, Yahoo stock has significantly declined in a broadly correcting market which has seen the Nasdaq Internet (QNET) index fall by 7.5% in the year-to-date. The correction in the markets has hit Yahoo, just as hard as hits to other momentum stocks like Twitter and Amazon. While we believe that stock like Twitter, Amazon and LinkedIn had long been due for a correction, the markets treatment of Yahoo in a similar manner has been unfair, which has resulted in a strong opening for the value investor. Let’s look at the price movements of different internet/technology stocks in the year-to-date.
|Stock Symbol||Name||1 month stock price gain/ loss (in %)|
Stocks with weak fundamentals
Fundamentally strong stocks
The above table leads to one clear conclusion. Yahoo stock has trade 2014 more in line with stocks with overvalued stocks like Amazon, Twitter and LinkedIn. Each of these could fit a case of a great company trading at a highly inflated price, with a correction being due for some time now.
On the other hand fundamentally sound stocks like Google, Priceline and Akamai have outperformed the broadly bearish markets due to the fundamental strength supporting the current valuations of these companies.
Considering the fact that Yahoo’s stock has more or less traded as a proxy for its Asian investments in Yahoo Japan and Alibaba, a relook at the sum-of-the-parts valuation based on the current numbers is merited.
Yahoo: A highly conservative valuation estimate
The various parts of Yahoo’s valuation continue to remain its stakes in Alibaba and Yahoo Japan with the core business making up the third part. In order to provide a fair value measure of Yahoo, we relook at our sum-of-the-parts valuation of Yahoo.
|In billions of $, except per share||Current valuation estimate||Value of Yahoo stake||Value per share ($)|
|Yahoo Net Tangible Assets||8||7.92|
*Yahoo Japan and Alibaba stakes calculated on a post-tax basis
The value of Yahoo Inc. is based on the net tangible assets as on December 2013. The calculation is summarized in the table below.
Yahoo Net Tangible Assets calculation (in billions USD)
|Intangibles and Goodwill||5.097|
|Total Intangible Assets||11.707|
|Net Total Assets||8.033|
Our Alibaba valuation is based on a Reuters poll of analysts which put the value at $140 billion. While the above valuation represents a potential 11% upside from the April 7th closing price, the value is highly conservative providing an inherent moat to our estimates, mainly on account of:
- Latest Alibaba valuations have ranged from $140 billion by Reuters to $200 billion by Australian investment bank Macquarie Group. Our $140 billion valuation is on the lower end of the range.
- Yahoo is only required to sell 9.5% of Alibaba in the IPO, thereby giving it exposure to post IPO upside in Alibaba stock.
Adjusting for the average value of Alibaba and assumption of stake retention by Yahoo puts our average value of Yahoo stock at $51.
Yahoo is highly attractive post the latest pullback in price. The latest price drop presents a decent upside using the most adverse constraints. Using highly conservative constraints, we see an upside of 11%, while a more realistic scenario could see the stock price go up to as high as $50 as we near the Alibaba IPO. We reiterate our bullish outlook on Yahoo. Keep reading for the latest updates from the world of internet stocks. Happy Investing!!
To see the current stock price of Yahoo click here: (NASDAQ:YHOO)