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Yahoo! Inc. (YHOO) Alibaba Spin-off Is Not a Disaster Just Yet

Yahoo! Inc (YHOO)

Yahoo! Inc. (NASDAQ:YHOO) has been reiterated with an Overweight rating by Morgan Stanley analyst Brian Nowak in a note issued on Monday. Nowak, who gave a price target of $56 to the internet firm, noted that the stock is trading as if it won’t be able spin-off its Alibaba Group Holding Ltd (NYSE:BABA) stake in a tax-free way, but the analyst note that the prospects are looking better.

Yahoo! Inc

Stock not reflecting true potential

In May, Yahoo’s spin-off plans came under question after Internal Revenue Service officials took the matter of tax “inversions.” The present sentiment on the stock reflects that the firm will not be able to sell its stake, but Nowak believes Yahoo has potential to pull it off.

Yahoo holds a 15% stake in Alibaba, and plans to sell it in the second half of 2015 in a bid to “to realize the value of this material component of its sum of the parts and market cap,” notes Nowak.

As of Monday, the analyst believe that Yahoo is expecting to sell the stake at the 35% tax rate. Though the Alibaba spin faces IRS uncertainty, Nowak notes that the firm has many options, allowing it an upside of 15% to 30%. The 15% option assumes a “buy and hold strategy for Alibaba with no liquidity discount closing,” while the 30% is based on a “successful spin.” Even a 50% chance of a tax-free Alibaba spin could help in 15% upside assuming Alibaba stock sees no rise.

Yahoo can explore other options

In a case, where IRS objects tax-free spin, the Internet firm can hold on to the stake, and still it will benefit. If Yahoo decides to go long on the Chinese firm, the analyst believes there is a 15% upside from the current level, which is based on the bullish view on Alibaba.

Also, Nowak suggests that Yahoo can “explore other strategic options,” by putting more “active assets” to meet the ATB requirements. The internet firm can also work on alternatives with Alibaba and/or Softbank, the analyst says.

And, if Yahoo goes for full 35% tax, then the downside is only 5% for the stock. Nowak terms the option to be “lowest probability outcome,” as it would not be logical to sell its stake at 35% tax rate, especially, if the firm “believes in its long term value.”

Nowak is also positive on Yahoo’s “core” business prospects. The analyst noted a “material cost-cutting opportunity” to better the firms core earnings, and could “drive further upside.”

On Monday, Yahoo stock closed down 1.96% at $38.61, and year to date, the stock is down almost 25%.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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