By
Eliot Murray
:
Yahoo! (
YHOO
) has been beaten down over the years by Wall Street and other
institutional investors who have written off the company as a "has
been" internet search company. Indeed, one reason I invested in
Google (
GOOG
) in the past is because they were so far ahead of Yahoo! in
internet search. It is true that Yahoo missed many of the trends
over the past decade: social, mobile, local, etc. However, I find
value in Yahoo's stock right now, and internet search is only a
small factor constituting that value.
Alibaba Group
Yahoo owns a 40% stake in a leading Chinese internet company
that is currently overlooked and undervalued by the market: Alibaba
Group. Alibaba is a very successful company in China that has a
stranglehold on many important markets in e-commerce today. To make
a comparison, if Amazon (
AMZN
), eBay (
EBAY
), and Staples (
SPLS
) all merged together, the newly formed entity would look a lot
like an American version of Alibaba. Here is a
quote
taken from Daniel Loeb's Fourth Quarter 2011 Investor Letter. His
fund, Third Point LLC, owns a large stake in Yahoo!:
According to iResearch, Alibaba currently has 49% of the B2B
e‐commerce market (four times greater than its nearest
competitor), 90% of the C2C e‐commerce market (analogous to
Ebay), and 53% of the B2C e‐commerce market (analogous to Amazon)
in 2011. It has complemented these core commerce positions with
the leading online payment platform, Alipay, with 49% market
share, and also holds the #2 share of the Chinese online ad
market (17%, behind Baidu at 28%). Particularly exciting is
Alibaba's share of China's rapidly growing B2C market represented
by Taobao Mall, or Tmall (recently renamed Tian Mao).
Alibaba is a wonderful company that many investors would rightly
love to own directly, but alas, it is not publicly traded. But
don't despair. By owning Yahoo!, you can vicariously own 40% of
this dominant company.
If you've ever kicked yourself for not investing in eBay or
Amazon during those early years, now's your chance to go back in
time and correct those mistakes. Alibaba is a tech company a lot
like those two companies that literally monopolize several of the
fastest growing industries in the world, and they are located in a
country that will experience exponential population growth along
with rapid growth in technology and infrastructure as it catches up
with America and the rest of the West. And best yet, their business
models have already been proven to work, just like eBay and
Amazon.
Here's another
quote
from Loeb from the same letter:
The scale and velocity of China's e‐commerce opportunity, when
combined with Alibaba's dominant position, make for a very
compelling story. As it moves toward an IPO, Alibaba should
quickly take its place amongst China's online leaders - Tencent
($47 billion market cap), and Baidu ($48 billion market cap). A
November 2011 report on Softbank by UBS's Makio Inui, the product
of extensive research into Alibaba Group and a detailed
valuation, placed a $63 billion value on Alibaba Group, which
would imply just over $13 per Yahoo share after tax. It appears
that while 2012 will be the year of Facebook, 2013 could very
well be the year of Alibaba as it moves toward a listing.
That $13 number has moved higher since he wrote that, since YHOO
has recently bought back shares. As I see it, if the $63 billion
value is correct, Yahoo's 40% stake is equal to $21.36 per YHOO
share, which is already much higher than the $14.65 that YHOO
as a whole trades
at right now, and Alibaba is only a piece of the Yahoo pie. If we
conservatively ratchet down the value of Alibaba to more like $40
billion, Yahoo's stake is worth $13.40 per share.
Two More Pieces: Yahoo! Japan and Net Cash
Yahoo's investment in Yahoo Japan (YAHOY.PK) is more easily
calculated, since Yahoo Japan trades publicly. According to their
most recent
10-Q
, YHOO's 35% stake in Yahoo Japan was worth about $6.5 billion.
However, in the 2 months since that filing, Yahoo Japan's stock
price has appreciated about 6%. Going through the math, that would
make Yahoo's stake in Yahoo Japan worth about $3.46 per share.
From their most recent 10-Q:
|
|
June 30, 2012 |
August 31,2012 |
| Japan stake pre-tax |
$6,500,000,000 |
$6,886,258,124 |
| % ownership |
35% |
35% |
| YAHOY's market cap |
$18,571,428,571 |
$19,675,023,213 |
| Japan stake post-tax |
$3,900,000,000 |
$4,131,754,875 |
| Per share value |
$3.27 |
$3.46 |
YHOO's net cash per share is $1.60 (including short-term debt
and government securities). If we add all these up and compare it
to today's stock price, it would give an implied value to Yahoo's
core business in online search advertising (yes, we haven't even
talked about that yet) of
negative
$3.81! Obviously this is not the case. Yahoo's core business may
leave a lot to be desired, but it's a solid, reliable cash cow that
brings in hundreds of millions in free cash flow per year, give or
take.
The Last Piece: Yahoo's Core Business
Looking at YHOO's
10-K filings
down through the years reveals how much the company has recorded in
earnings from equity interests (using the Equity Method) from
Alibaba and Yahoo Japan. Below is a table with those two components
carved out in order to present Yahoo's core business earnings, as a
standalone number without the help of its two greatest
investments.
|
|
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
| Net Income |
1,896 |
1,896 |
660 |
424 |
598 |
1,232 |
1,049 |
| less Alibaba's contribution |
|
(30) |
(30) |
(273) |
25 |
(42) |
(90) |
| less Yahoo Japan's contribution |
(128) |
(147) |
(153) |
(212) |
(300) |
(400) |
(400) |
| Yahoo's Core Business Earnings |
1,768 |
1,719 |
477 |
(61) |
323 |
790 |
559 |
| Core business earnings as % of Total |
93.2% |
90.7% |
72.3% |
(14.4%) |
54% |
64.1% |
53.3% |
As you can see, Yahoo's core business earnings as a percentage
of total earnings have been decreasing over the years as Alibaba
and Yahoo Japan continue to increase in value and make up more and
more of Yahoo's earnings. However, we can't just discount this area
totally, like the market is doing right now. A reasonable estimate
may be to take the average of the last three years of results and
expect Yahoo's core business to contribute near that amount in the
future. If we can count on new CEO Marissa Mayer to grow these
earnings a mere 3% per year for 10 years, that's a net present
value of $3.04 per share (using a discount rate of 12%). Or perhaps
we could assign a multiple to the core business segment. At $3.04,
that translates to a mere 6.5x multiple on Yahoo's core business,
which is conservative.
Adding all the pieces up, we get a valuation that looks like
this:
| Alibaba stake |
$13.40 |
| Yahoo Japan stake |
$3.46 |
| Net Cash per share |
$1.60 |
| Core Yahoo |
$3.04 |
| Total Valuation (per share) |
$21.50 |
At Yahoo's present stock price of $14.65, the above valuation
implies a 47% possible upside in shares of YHOO. Even if you value
Yahoo's domestic search business at a big 'ole goose-egg (in other
words, zero), the shares still seem undervalued at today's prices
because of Yahoo's ownership of Alibaba and Yahoo Japan.
Catalysts
Because Alibaba and Yahoo have recently reached an agreement in
which Alibaba will buy back some of Yahoo's interest in the
company, possibly as early as in Q3 (which is right now), I see
this as a near-term catalyst of value realization for shareholders.
In addition, Marissa Mayer should be an asset to the company and
should add momentum to the share price. Loeb, quoted above, has put
his money where his mouth is, buying nearly $40 million of Yahoo
stock last month. In total, Loeb has put over 12% of his $9 billion
hedge fund into Yahoo shares.
YHOO stock could decline a little more over the coming months,
but with the Alibaba deal expected in Q3, I don't really see a lot
more downside from here.
Disclosure:
I am long [[YHOO]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
this article.
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