Yahoo! Inc. ‘s shares are down significantly over the last one year. But when you consider a 5-year horizon, the stock is up by more than 165 percent. And this despite any visible signs of growth within the growth! The long-term rise in the stock is largely on account of the soaring valuation of Alibaba Group Holding Ltd . But what went wrong in the past year that Yahoo is trading down 30 percent?
Don’t Let the Short-term Weakness Scare You
The primary reason for Yahoo! Inc. ’s under-performance is the current weakness in the Chinese equity markets. A very large part of Yahoo’s market capitalization is tied to Alibaba Group Holding Ltd , which is essentially a China-focussed company. As such, the sell-off in China is not helping its share price.
Another factor playing in the minds of investors is the potential US Internal Revenue Service risk. Will the spin-off hit a snag? Fears were reinforced following a statement from an IRS official that cast doubt on Yahoo! Inc. ‘s plans for a tax-free spin-off. Many shareholders, who had acquired Yahoo, hoping they would get a tax-free payout once the spin-off closes, were forced to offload their positions.
Yahoo currently has a $35 billion market cap: $30 billion for Alibaba Group Holding Ltd and $5 billion for Yahoo core. But what about Yahoo! Japan (at $9 billion approx), and cash holdings of $7 billion? That roughly adds up to $16 billion of assets, which are completely unaccounted for.
What’s even more important is that those unaccounted assets will be far more valuable to Yahoo post the spin-off, when it becomes a $5 billion company, compared to today’s $35 billion market capitalization.
Yahoo Core is Worth Much More
Yahoo! Inc. ‘s core operations are a complicated mix of both strong and weak businesses. PC advertising and display have been a drag for quite some time. However, performances of the mobile and video segment have been encouraging. Yahoo’s total revenue during the last reported quarter was flat, but revenue from mobile, video and native advertising soared 60 percent to $399 million, representing 35 percent of the company’s traffic-driven GAAP revenue.
Unfortunately, because these fast-growing businesses are tangled with Yahoo’s weak assets, most analysts on Wall Street peg the core business at about $5 billion. But by next year, once the spin-off is done and Yahoo becomes a much smaller entity, investors will hopefully realize the potential of these businesses to drive revenue growth.
Whatever be the Street outlook, the fact of the matter is that Yahoo! Inc. ‘s assets excluding Alibaba are much undervalued. Even by the most conservative estimates, the value of sum of all its parts well exceeds Yahoo’s current market cap. Sooner or later, that value will get reflected in its stock price. Whether that happens before the spin-off or after is anybody’s guess.
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