Yahoo (YHOO) is closing out its best week of gains in about two years, with YHOO stock up about 9% on the week. And bigger picture, YHOO stock is up 65% on the year and the Yahoo stock price has more than doubled from its 52-week low of $15.65 last October.
YHOO stock investors are obviously thrilled, but what about new money plotting an entry in Yahoo stock? Is the internet advertising giant a buy right now as momentum stays red-hot, or is YHOO set for a fall?
I remain convinced that Yahoo stock has seen all the gains it is going to in 2013, and that new money should look elsewhere — perhaps to competitor Google (GOOG) — and that those holding YHOO stock should at least consider taking some money off the table to protect their profits.
The bottom line is that Yahoo has run up on sentiment and hopes of the Alibaba IPO happening this year or next. And now that the gains are baked in and the Alibaba IPO is moving forward, the remaining core business of YHOO is nothing to get excited about.
You can keep holding if you’re greedy, either for a bigger Alibaba IPO projection — or heck, hold long-term because you expect them to cash out that stake and deliver the money mostly back to shareholders the way AOL (AOL) did after it sold off patents for $1.1 billion to Microsoft (MSFT).
But there are risks associated with that plan that seem bigger than the reward, in my opinion.
YHOO Stock – Nothing More Than Alibaba IPO Play
The Vogue cover of Yahoo CEO Marissa Mayer, the chatter about the end to YHOO telecommuting, the Tumblr buyout … all this is just noise.
Yahoo investors in 2013 who have been chasing anything other than the Alibaba IPO may have made some money, but they shouldn’t fool themselves into thinking it has anything to do with how Yahoo is run.
It’s all about YHOO holding a 24% stake in Alibaba. Which, by the math of a $15 billion Alibaba IPO projection with an overall valuation as high as $200 billion, means over $48 billion in equity in the Asia internet giant. That’s amazing if it holds, considering the current Yahoo market cap is just $34 billion.
If anything, the power of the Alibaba stake is so great that it has allowed YHOO stock to overcome the problems that are endemic to its U.S. internet business. Yahoo stock has suffered a stagnant or slipping top line for ages, and four out of the past five quarters featuring a decline in overall revenue.
Yahoo execs are quick to point out that profits have stabilized and are starting to grow modestly again, but a company doing more with less is not a growth story. It’s also not a reason to bid up Yahoo to 20 times forward earnings in the face of declining online advertising rates.
A look at the core operations of Yahoo shows a company that hasn’t so much turned around as stabilized. So if you think the run-up in YHOO is a validation of the Marissa Mayer era and not enthusiasm over Yahoo’s alibaba stake … take another look at the numbers.
What Happens to Yahoo Stock Now?
Of course, we are reaching the culmination of the Alibaba IPO hype with reports now that the Asia internet company is exploring its options for the much-anticipated event. The speculators who got in thanks to the Alibaba stake are laughing all the way to the bank, and eagerly awaiting the final price tag for the Yahoo stake.
If the Alibaba IPO is priced aggressively and the mega valuation of $200 billion holds, Yahoo stock could move significantly higher based on its stake being worth even more than investors had expected.
But keep in mind that these things swing both ways. If the Alibaba IPO hits a snag or if the company is valued at less than what Wall Street had expected, YHOO stock could take it on the chin.
It’s tempting to mull over Yahoo stock based on the narrative. Sure, it bought Tumblr and is sucking up tiny mobile companies and has a rockstar CEO who can do no wrong. And as long as optimism about an Alibaba IPO is driving YHOO stock, expect that narrative to hold.
But if things don’t go as planned, expect the story to change to one of a perpetually struggling internet stock past its prime.
There’s a lot riding on the Alibaba IPO for Yahoo stock investors, since sentiment could shift in a hurry. At this point the massive gains in YHOO year-to-date have already priced in a reasonable valuation for its stake in the Asia internet giant.
YHOO could always go up from here. But it’s certainly not a sure thing — and the prudent move would be to take money off the table if you own Yahoo stock.
Related Reading on Yahoo Stock
- Alibaba may list in the U.S., not Hong Kong, because of an odd management structure. (AP via ABC News)
- Yahoo and Softbank both back Alibaba in the management move. (Reuters)
- Yahoo chasing Google in the acquisition race. (Basics Media)
- What is Yahoo exec Marissa Mayer actually doing? (The Atlantic)
- Yahoo posts Q2 earnings, and Mayer isn’t ready for her closeup. (Forbes)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he had no positions in the stocks mentioned. Write him email@example.com or follow him on Twitter via @JeffReevesIP.