Yahoo! Inc. ’s share price has fallen below the “worst-case” sum-of-parts valuation. That’s not saying the downside is capped from these levels. A falling tide will sink all boats. Yahoo cannot operate against the market’s inertia. But at least investors can take confidence from the fact that once the market mood turns favourable, Yahoo may lead a swift bounce-back.
The Worst Case Sum of Parts Value
Yahoo! Inc. owns a sizable stake in Alibaba Group Holding Ltd . In January, Yahoo announced a plan to spin-off its Alibaba stake to shareholders on a tax-free basis. But investors are anxious that Yahoo may be blocked from executing the deal because of tax concerns. The worst that could happen right now is that Yahoo will be forced to pay taxes on the stake sale. Even factoring that “worst case scenario”, the sum-of-parts valuation is higher than yesterday’s closing price of $31.77.
Yahoo! Inc. owns 394 million shares of Alibaba Group Holding Ltd , and based on its $65.50 closing price Wednesday, that stake is worth about $16.50 per Yahoo share. Meanwhile, Yahoo’s 35.5 percent stake in Yahoo Japan is estimated to be worth around $6 per share.
The search engine also has roughly $4.40 a share in cash – thanks to the large amounts of stock is bought over the past 12 months. Now even if we give Yahoo just 4 times its EBITDA for the core business, the per share valuation comes to about $32!
Of course Yahoo! Inc. ’s core business could fare much worse, and Alibaba’s stock could fall even further. But Yahoo also has some positives going for it. Firstly, whatever be the yardstick, Alibaba is deeply undervalued. That should change over the next 12 months as the Chinese firm improves its monetization of mobile GMV. Also the tech giant may be able to offload its Alibaba Group Holding Ltd stake to shareholders in a tax-free deal, which definitely would unlock significantly more upside. The core business could also surprise, especially if it succeeds in generating strong revenues from Tumblr.
The IRS is still studying the details of a potential spin-off of Alibaba from Yahoo! Inc. The outcome of that ruling could make a huge difference to Wall Street’s perception of Yahoo’s fair value. Shareholders have been eagerly awaiting a Private Letter Ruling on the Alibaba deal from the IRS. But as more and more time passes, it is looks increasingly unlikely that a ruling will come before the proposed Q4 2016 spin-off.
Shares of Yahoo! Inc. are down nearly 36 percent this year. Since Alibaba Group Holding Ltd began trading publicly, Yahoo’s shares are down about 18 percent.