Yahoo Valuation Post Alibaba IPO

  • With the Alibaba IPO over, Yahoo’s core business will be back in focus.
  • We revisit our Yahoo valuations to reflect our latest opinion on Yahoo’s core business and its equity investments.
  • We see a solid upside potential for Yahoo, given the company’s focus on native advertising and premium content. Our bullish outlook is highlighted in our current Yahoo stock analysis.
Yahoo valuation post Alibaba IPO

Yahoo (NASDAQ:YHOO) has for long traded as a proxy for its investment in Alibaba, the largest e-commerce company by gross merchandise volume (GMV). However, with the Alibaba IPO behind us, the focus will now be back on Yahoo’s core operations. We update our Yahoo valuations to reflect the current state of its core business, which we think is on course for a turnaround.


Yahoo Core Business Turnaround

Yahoo’s focus on the mobile platform, native advertising and premium content generation is beginning to draw advertisers back to the firm, and Yahoo's core business is recovering. As the number of advertisers partnering with Yahoo continues to rise, the trend of falling cost per click will slowdown /rebound and revive growth in Yahoo’s display ad business, which is a major contributor to Yahoo’s topline.

Yahoo Valuation

Having got an idea of where Yahoo core business could be headed, we re-evaluate Yahoo and its equity investments in order to update our sum of the parts valuation of Yahoo and calculate the intrinsic value of Yahoo.

Gains From The Alibaba IPO

Yahoo recently sold a part of its Alibaba (NYSE:BABA)stake in the Alibaba IPO. Yahoo sold 140 million shares in the IPO at a price of $68 per share and is now left with a stake of 383 million shares in the Chinese e-commerce behemoth. We calculate the value of Yahoo’s current Alibaba stake and add back the cash payout from the IPO to arrive at the current per share value of Yahoo’s Alibaba stake. The table below summarizes the value per share of Yahoo interests in the Alibaba stake.

Alibaba stake value (in billions of $, except number of shares and per share value)

Alibaba Current price (in $, Oct 8th closing price)

88.3

Value of Yahoo’s post IPO Alibaba stake (383M shares)

33.82

Value of Yahoo’s post IPO Alibaba stake (35% tax rate)

21.98

Cash payout from IPO

9.52

After tax cash from IPO (35% tax rate)

6.19

Total after tax value of Yahoo’s Alibaba post IPO stake and IPO cash payout

28.17

Yahoo current number of shares (in millions)

994.6

Per share value

28.32

Based on the latest available Alibaba stock quote (October 8th closing price), and assuming a tax rate of 35%, the after tax value of Yahoo’s post IPO Alibaba stake and cash payout from the IPO come to $28.32 per yahoo share.

Yahoo Japan Stake

We now value Yahoo’s other Asian investment, a 35% stake in Yahoo japan. The stake is value at the latest available information for Yahoo Japan listed on the Tokyo stock exchange (Oct 9th closing price) and the USD/JPY forex rate at the time of writing.

Yahoo Japan stake Value per share

JPY

USD

Value of Yahoo Japan (billion)

2360

21.87

Value of Yahoo Inc. stake (35%)

826

7.66

Per share value

817.82

7.58

USD/JPY (Oct 9th)

107.89

Based on the latest price and Forex data, the contribution of Yahoo japan to Yahoo’s value per share comes to $7.58. The sum of its equity investments in Alibaba and Yahoo Japan come to a after tax value of $35.90, representing 87.4% of Yahoo’s October 8th closing price.

Yahoo Valuation

We evaluate Yahoo's core business in relation to its peers from the online advertising industry. The table below summarizes the current PE ratio and price to sales ratio of three peers: AOL, Google (NASDAQ:GOOGL), and Facebook (NASDAQ:FB).

AOL

Google

Facebook

Average

Current price (Oct 8 2014 closing price)

44.09

583.74

77.52

Market Capitalization, in millions of $ (As of Oct 8th)

3410

388320

198360

LTM revenues ($, in millions)

2430.4

63126

10013

LTM diluted EPS ($)

0.9

19.36

0.92

LTM P/S

1.40

6.15

19.81

9.12

LTM P/E

48.99

30.15

84.26

54.47

On a price-to-sales ratio valuation, AOL is the cheapest of the three peers while Google is the most attractive on a PE ratio based valuation. We now use these reference valuation multiples to estimate the value of Yahoo core operations.

Yahoo core business

2013-09

2013-12 2014-03 2014-06

LTM

Revenue ($, in millions)

1138.97

1265.8

1132.73

1084.19

4621.69

Yahoo diluted EPS

0.28

0.33

0.29

0.26

1.16

Yahoo advertising segment value at AOL P/S ($, in millions)

7394.70

Yahoo advertising segment value per share (PS valuation)

7.43

Yahoo advertising segment value per share (PE of 10 valuation)

11.6

Average value per share of Yahoo

9.52

We estimate the value of Yahoo core operations using two approaches of PS based valuation as well as a PE ratio based valuation. The final average value per share is arrived at by averaging the output of the two approaches. Our estimate of Yahoo core business comes to $9.52, which is a very conservative estimate considering the revenue and earnings growth which will result from Yahoo’s focus on native advertising, mobile focus and premium content generation.

Yahoo Stock Intrinsic Value

Based on our sum of the parts valuation, we update our Yahoo price estimate to $45.4, which represents a 11% upside from the last closing price of Yahoo (Oct 8th). Hence, Yahoo is currently priced lower than its intrinsic value and could present investors with a solid upside over the coming quarters. With analysts expecting topline growth to be revived in 2015, $45.4 appears a very conservative estimate. We currently have a bullish outlook on Yahoo, which is reflected in our current Yahoo stock analysis.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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