Yahoo! Inc. (YHOO) has displayed good relative strength lately, with YHOO running to a new 52-week high of $34.89 to end last week.
But can Yahoo stock keep this up going forward?
Well, it all depends on the YHOO share in the upcoming Alibaba IPO.
Because while some Yahoo stock investors are still over the moon about CEO Marissa Mayer and optimistic about content and advertising strategies, the bottom line is that an Alibaba IPO is the biggest driver of Yahoo’s bottom line in the coming year.
And unfortunately, the cat is out of the bag when it comes to the Alibaba IPO potential — and with YHOO already baking in gains from its stake in this offering, it remains unclear what else Yahoo has going for it to move the stock higher … other than pure sentiment, that is.
YHOO and the Alibaba IPO
With a 24% stake in the Asian internet giant, Yahoo would stand to have a position worth $24 billion if the claims of a $100 billion valuation hold up for Alibaba. That would be huge, no doubt about it.
And given the continued success that Alibaba is enjoying — including revenue soaring from under $3 billion in 2011 to about $5 billion last year, and moving even higher in 2013 — it’s easy to imagine Yahoo commanding even more value for its stake beyond the immediate pop from the day of the Alibaba IPO.
But for starters, consider that Yahoo has promised to sell half its shares on the IPO. With that in mind, its stake in the continued upside will be very limited. Instead, the biggest impact on YHOO will be the offer price.
Furthermore, the Alibaba IPO is unique in that it is not raising funds for ambitious growth and thus doesn’t have the same incentive to achieve a maximum share price at the offer date. It has plenty of cash, recently borrowing $8 billion at an interest rate of roughly 4%. That’s plenty of play money — and more than half what the company will likely raise with its IPO.
Yahoo will also lose a board seat after the Alibaba IPO, so will have much less say in how the company moves going forward — and thus less impact on how to maximize value in its remaining stake.
Oh and by the way… there’s almost no chance this Alibaba IPO will happen in 2013. There aren’t even bankers lined up for Pete’s sake.
Add all this up and the Alibaba IPO needs to go off with flying colors to justify more upside in Yahoo stock based on this stake.
Yahoo Stock is Lackluster Otherwise
The core business of Yahoo outside of Alibaba — that is, content and display advertising — is painfully pedestrian. YHOO continues to suffer under the decline of the old “portal” Internet model and ever-declining advertising rates for web publishers.
Much ado was made about Yahoo in January when the company posted its first year-over-year revenue growth in four years. But the measly 2% increase was followed by two earnings reports that showed a resumption in top-line declines. On the whole, Yahoo revenue for 2013 is looking flat at best with fiscal 2012 and 2011, and down about 20% from 2010.
Sure, Yahoo has managed to grow its user base and made a splash recently by boasting more monthly visitors on its network than even Internet behemoth Google (GOOG). However, Yahoo still faces big pressures. Even if it can figure out a way to grow its audience in the face of social media like Facebook (FB) and Twitter (TWTR), the migration to mobile is wreaking havoc on margins. The world over, monetizing mobile at the same rate as desktop traffic is a much harder game.
Yahoo earnings on Oct. 15 will likely be overshadowed again by Alibaba IPO buzz. But investors who want to hang on to their shares for the coming months in anticipation of this offering better take a good look at the underlying business.
Because now that an IPO premium has been baked in … that’s what you’re holding on to.
It’s worth noting that some hope Yahoo will deliver its windfall of cash back to shareholders. There is certainly precedent for listless internet companies doing this — think AOL (AOL), which sold patents to Microsoft (MSFT) for $1 billion then returned that cash via a special dividend and massive buyback plan.
But Yahoo didn’t deliver a dividend when it sold half of its Alibaba stake. Instead, the newly ensconced Marissa Mayer embarked on an acquisition frenzy — including $1.1 billion for Tumblr and about two dozen other deals in the last year.
A cash-rich Yahoo would surely feel increased pressure to deliver some of that cash back to shareholders after the missed opportunity in 2012.
But if you’re hanging on to YHOO based on the hopes of an Alibaba IPO in the next few months, that offering going off without a hitch and then Yahoo stock delivering a big special dividend … well, that’s a lot of “what ifs” and a lot of things that have to happen in a hurry for your investment to pay off.
Related Reading on YHOO and Alibaba
- In defense of Yahoo stock, Mayer claims that traffic is up 20% since she took over. (All Things D)
- Hong Kong doesn’t need an Alibaba IPO. (Moneybeat via WSJ)
- Founder Jack Ma looks to keep a tight grip on Alibaba after it goes public. (Reuters)
- Why the Alibaba IPO holds both promise and pain for YHOO. (Dealbook via NYT)
- A look at just some of the recent acquisitions rolled into Yahoo stock in the last year. (Mashable)
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 did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.