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Alibaba Stake Is the Only Reason to Own Yahoo Stock

Yahoo (YHOO) posted second-quarter earnings Tuesday that should have proved once and for all that there is only one reason to invest in the stock: Yahoo’s stake in Chinese e-commerce and Internet giant Alibaba Group.

The company’s Q2 earnings were riddled with the same problems as always — no long-term vision, a reduced forecast for revenue and profit, and declines in ad rates thanks to a move to mobile.

But none of that showed up in the bottom line because Yahoo earnings beat expectations thanks to its 24% stake in Alibaba.

So if you’re owning Yahoo stock for any reason other than its fast-growing Alibaba unit and the hopes of an IPO for the property soon … well, you’re doing it wrong.

Former Google (GOOG) exec and current media darling Marissa Mayer has tried to turn around the struggling portal business of Yahoo as CEO, focusing on content, spending on acquisitions like the $1.1 billion Tumblr buyout and refreshing old products like its Flickr photo sharing site.

But none of that has mattered. The trend remains down for revenue, and Alibaba still is the tail that wags the dog.

Going forward, it’s unlikely anything will change, either. Mobile is incredibly competitive — and other web properties such as social media giant Facebook (FB) already have made massive inroads into the space, but with limited profitability. And until the free fall in online advertising revenue stops, any nominal improvement there will not necessarily result in growth for Yahoo.

To be fair, it’s not necessarily Yahoo’s fault. AOL (AOL) faces the same problem with the secular decline of portals — that is, Internet homepages where people used to go to check their mail and get the headlines of the day. But Yahoo does have an obligation to adapt.

The irony is that Yahoo’s Alibaba stake was actually reduced after a late 2012 sale to trim its then-40% stake in the Internet company — and shares are up about 70% since that deal was finalized.

Just imagine how Yahoo stock would be faring with that bigger stake.

Of course, Alibaba isn’t a long-term plan for YHOO investors and will only juice Yahoo earnings until the company inevitably becomes its own publicly traded stock. So clearly, Marissa Mayer and Yahoo need to plot some other strategy for growth down the road.

But unfortunately, those plans haven’t come to anything. And right now, Alibaba is the only reason to hold Yahoo stock.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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