- Yahoo continues to be undervalued using a sum-of-the-parts analysis.
- The recent price pullback is a buying opportunity considering the upcoming Alibaba IPO and the improving core business indicators.
- The current stock price implies a 22% upside to our worst case scenario target price of $43.5
The buzz around Yahoo (NASDAQ:YHOO) is on the rise, as each passing day brings us closer to a potential cash windfall for the Marissa Mayer led company arising from Alibaba IPO. Yahoo Inc. stock price, for the major part of the last year, has been driven by its investments in Alibaba and Yahoo Japan, gaining 54% over the last one year (March 25, 2014 closing price), huge returns by any standard. We first covered the stock in September 2013 when the stock was trading at a price of $31, pegging the target price to be around $43 per share. The stock has been on the rise, more or less in line with our estimates, driven by the value of its investment basket rather than its core business operations.
In our last analysis of the Yahoo stock entitled, we had valued Yahoo based on Yahoo's investments in Alibaba and Yahoo Japan.This helped us arrive at a fair value for Yahoo stock price. The Yahoo stock analysis studied the various possible scenarios with respect to Alibaba to arrive at the overall value of Yahoo stock under three scenarios: worst case, best case and average (midpoint) scenario. The Alibaba pre-IPO valuation scenarios are presented in the table below.
|Alibaba IPO Valuation (billion $)||120.0||140.0||160.0||180.0||200.0|
|Value of Yahoo's 24% stake ($ million)||28.8||33.6||38.4||43.2||48.0|
|Post tax value of mandatory 9.5% exit *||7.4||8.7||9.9||11.2||12.4|
|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
The value of Alibaba’s IPO to its early investor Yahoo is assuming significant importance in light of recent reports hinting at an IPO in the near future. One Bloomberg report hints at the Alibaba IPO as soon as next month (April). The current estimates valuing Alibaba from $128 million, by Reuters to valuing it at $250 billion, by IG group once again brings into focus our scenario analysis approach to estimate the value per share to Yahoo. Our estimated value per yahoo share ranges from $24.6 to $40.9 on an Alibaba valuation ranging from $120 billion to $200 billion.
The sum of the parts also included the value of Yahoo Japan and Yahoo Inc.’s core business to estimate the true value of Yahoo. The three scenario valuation of Yahoo is given below, as depicted in our earlier article.
|Yahoo Valuation||Worst case||Best case||Midpoint|
Taking the bull case ahead is the potential turnaround in Yahoo's core business, which could continue to drive the stock price even after the buzz around the Alibaba IPO settles down.
Our bullish outlook on Yahoo continues, driven by the turnaround in core business and upcoming IPO of Alibaba. Strengthening our bullish outlook is the recent fall in Yahoo stock price. The stock is down 11% since its March peak price of $39.95 (hit on March 6 2014). The current price (March 27th close) of $35.45 represents a 22% upside to our worst case scenario price of $43.5, which will likely be hit as the Alibaba IPO unfolds over the coming months. The latest drop in price represents a very attractive entry point for a value investor, which has been the fundamental reason for Yahoo’s addition to our positive watchlist. Keep reading here to see the latest updates and valuations from the world of internet.