The recent weeks have seen one stock registering significant gains. Gains of 7% in one week and 12% over one month will be numbers we would take home happily. The story isn't complete there. Yahoo Inc. (NASDAQ:YHOO) stock price has gained over 100% since Marissa Mayer took over as CEO last year. There have been numerous explanations, attributing the gains to a number of factors, some financial and others non-financial. One simple explanation which is easiest to understand is that lady luck has been smiling on the company for the past one year. More logical explanations are ranging from Yahoo’s new focus on improving its core business of online advertising to aggressive acquisitions. We take a look at the current status of the company and give our explanation as to why the stock price, which has been going northward for quite some time, still has a fair amount of upside left.
We look at the Yahoo stock deriving its value from three underlying components: Yahoo’s core business of online advertising, search and display; value of Yahoo’s Alibaba stake; and the value of Yahoo’s stake in Yahoo Japan. Yahoo Inc.’s equity investments in Alibaba, the Chinese internet and e-commerce giant and Yahoo Japan, the Japanese internet search services provider, have therefore been of significant interest to investors of Yahoo. The latter is a publicly listed company and the value of Yahoo Inc.’s 35% stake is easy to understand. The black-box in understanding the true value of Yahoo stock has been the company’s stake in Alibaba which has analyst valuations ranging from $65 billion to as high as $150 billion. The only certain fact is that Yahoo’s current stake in Alibaba stands at 24%, a significant portion even considering the most conservative of Alibaba’s valuation estimates.
Alibaba, the golden egg yet to hatch
Yahoo purchased a 40% stake in Alibaba way back in 2005, for a small portion of its total cash holdings at that time. At that time none would have thought that Alibaba will soon become the golden egg among Yahoo Inc.’s investment.
Supernormal growth every investor would love
We now look at the value of the Chinese company based on numbers reported in Yahoo Inc’s reports over the last 6 years. One look at the revenue growth chart below and most of us will be convinced that Alibaba is one of the fastest growing internet companies in the world.
The company has registered average revenue growth of 67.89% every year for the last 6 years. To put that into perspective, Amazon (NASDAQ:AMZN) one of the fastest growing companies around today has managed average growth rate of 34% over the same period. The last two years have been even better. Alibaba has grown at an average growth rate of 77% over the last two years, making Tencent’s average growth rate of 51% over the same period seem quite ordinary. Just to put things in the right place Tencent is the fastest growing among publicly listed Chinese internet companies with a current market value of $97.5 billion.
Having accepted the fact that Alibaba is generating extraordinary growth, another important question in the minds of investors, who aren’t yet convinced of its value, will be whether or not the company is profitable.
Profit margins any investor would love
If profitability is a major factor in your investment decision, then Alibaba will rank at the top of your positive list. The revenue growth of Alibaba, which has been stratospheric, seems even more extraordinary when we consider that the company has managed that at Net Income margins which are highest among similar companies. The current Net Income margins of the company at 28.8% are significantly ahead of EBay’s (NASDAQ:EBAY) 17.8% with Amazon nowhere in sight.
Considering the fast paced growth of Alibaba with industry leading margins, our conservative value estimates on a relative valuation basis are in the range of $ 75 billion to $90 billion, putting our average value estimate of Alibaba at $82.5 billion. The per share worth of Yahoo’s 24% stake in the company, as per our estimates ranges from $17.65 to $21.18, with an average value of $19.41 per Yahoo Inc. share.
Yahoo Japan: A significant contributor to Yahoo stock value
We will now look at the contribution of Yahoo Japan to the value of Yahoo stock. Yahoo Japan, as per yesterday’s close had a total market value in excess of $32 billion, putting the value of Yahoo Inc.’s 35% stake at $11.37 billion or $11.15 per Yahoo Inc. share.
Yahoo’s Core Business
The value of Yahoo’s stake in Alibaba and Yahoo Japan gives us a per Yahoo Inc. share value of $30.56 against the current market price of $31.34. Yahoo Inc.’s core business, though on a decline for the last few quarters, even today remains profitable. Yahoo’s earning per share for the last four quarters, excluding one-time gains, were $.30, $.34, $.32 and $.35 totaling up to a 12 month earning of $1.31. Considering the declining state of its business we value the contribution of the core business at a pessimistic price-to-earnings ratio of 10 against an industry average close to 25. Yahoo’s core business, as per our calculations contributes a value of around $13.1 per share to Yahoos stock price.
Having figured out the value of each of the components of yahoo’s stock, the total value per share of Yahoo Inc., as per our calculations, is summarized in the table below.
|Yahoo Value (segment-wise)||Per Share Value|
|Core Business (Advertising, Display & Search at conservative P/E of 10)||13.10|
|Alibaba stake average valuation (pessimistic value: $17.65 & optimistic value: $21.18)||$19.41|
|Yahoo Japan (from actual list price from Tokyo Stock Exchange)||$10.84|
|Yahoo Intrinsic Value||$43.35|
Yahoo stock closed yesterday’s regular trading session at $31.34, registering a gain of 0.22% over the previous close. The stock has gained over 7% in the last 5 trading session and we won’t be surprised to see the stock continue its climb at least to levels of $40 which, according to us, is a conservative estimate.
To see Yahoo’s latest stock price movement, click here (NASDAQ:YHOO)