The big picture

yhoo stock yahoo marissa mayer
Vogue
Sponsored By:

Why Yahoo Stock Performance Has NOTHING to do with Yahoo.com

yahoo stock logo yhooYahoo (YHOO) stock is up 68% year-to-date, and while YHOO has softened lately after earnings it remains one of the year’s best plays.

However, YHOO investors better understand what they own if they expect to make any money on this stock going forward. Because Yahoo stock is wholly about Asian internet use — and has NOTHING to do with U.S. web properties under the Yahoo.com umbrella.

YHOO hates to admit this. In fact, in its recent earnings call the company’s CFO declared “I’m not gonna talk about Alibaba any further tonight,” in an almost comic avoidance of the 900-pound gorilla in the room.

Sure U.S. users are up, and YHOO is rejiggering products and buying out new companies. And sure, Wall Street still thinks Yahoo CEO Marissa Mayer is a genius who can do no wrong.

But whether or not Yahoo wants to talk about Alibaba or its Asian businesses, they matter most — and investors can’t forget that.

yahoo yhoo stock valuation
Click to Enlarge
Consider a recent note from Bernstein analyst Carlos Kirjner as a case study. Kirjner breaks down Yahoo’s value by business segment and the core U.S. operations. By his estimates, the core operations is worth just $6 in share price based on 2015 estimates — a fourth of the $24 he is valuing the residual Alibaba stake at, and less than the 35% stake YHOO owns in Yahoo Japan!

Think about that for a moment: One analyst is saying that $31 of Yahoo’s “fair value” share price of $40 is attributable to Asian internet operations!

Maybe that’s why despite a steady downward spiral of ad revenue over the last few years, YHOO stock is now at its highest price since 2005… because frankly, it’s content and advertising on Yahoo.com simply doesn’t matter to investors.

Yahoo Stock Still Has Upside, But It’s Complicated

Don’t mistake this for a damning of Yahoo stock simply because it’s U.S. business is irrelevant.

If anything, it’s incredibly liberating for YHOO to have this Asian internet might to rely on instead of the risk of perpetually declining ad sales dictating stock performance.

After all, the latest numbers showed a continued lack of growth. Net revenue dipped slightly and guidance disappointed when the company reported Q3 earnings last week.  And specific to U.S. businesses, display ad revenue dropped by 7% over last year.

If that’s the future of the stock, clearly investors wouldn’t be bullish.

Instead, it’s the stake in Asian Internet businesses that have YHOO investors excited. Most speculate the Alibaba IPO will unleash a $100 billion internet giant — with some valuing the company as high as $200 billion by the end of 2014.

Yahoo investors, then, are rolling the dice based on how much Alibaba will be worth — and more importantly, how much YHOO can make from its 24% stake.

Adding to the complexity is a 35% stake in Yahoo! Japan, which remains the nation’s #1 website. While not as sexy as a China play because of the sheer scale and growth potential of that nation, Japan boasts 80% internet use among its population for a user based of over 100 million people — making it the fourth largest national market in the world.

Thanks to a more dominant position in Japan as well as a bull market and economic optimism in that nation, Yahoo has been able to benefit handily from its Japanese stake. Yahoo Japan Corporation, which trades independently on Tokyo’s stock exchange, is up 80% year-to-date in 2013.

Oh yeah, and then there’s over $6.3 billion in cash and investments sitting around at YHOO.
So the question for investors, then, is not whether there is growth ahead for U.S. advertising revenue at Yahoo… because there decidedly is not. The challenge is how to value these other segments, and to explore how they could fuel Yahoo growth.

Is Alibaba a Sure Thing?

There is a ton of chatter out there about how big Alibaba will be, and how much Yahoo can expect to get paid. This is obviously going to be the biggest driver of Yahoo stock price going forward… but is there more upside, and is Alibaba a sure thing?

Nobody knows for sure. While it’s clear Alibaba is growing briskly and is a Wall Street sensation right.  Remember that in the wake of the Facebook (FB) IPO, there’s a lot to be said for managing expectations at the offering instead of squeezing every single penny out of your initial valuation… and if Alibaba decides that most of the shares offered at IPO are going to be Yahoo’s, they will want to ensure that they leave some of that value untapped. Remember, Alibaba has plenty of cash and recently borrowed $8 billion at a modest interest rate so doesn’t need to squeeze every penny from the markets via an initial public offering.

But either way, thanks to terms of ownership there will a sale of 40% of the remaining YHOO stake in Alibaba at IPO. So how much will that stake be worth?

And more importantly, what will that cash be used for? Yahoo CEO Marissa Mayer has made a number of acquisitions since taking over including buying blogging platform Tumblr for $1.1 billion as well as a host of smaller mobile businesses. Would YHOO make more big moves with the cash? Would it deliver a special dividend to shareholders and/or a massive stock buybac?

These are the real questions in regards to how Yahoo stock will perform going forward.

So quite honestly, a discussion about Marissa Mayer’s ability to increase domestic users on Yahoo.com is completely missing the point.

The future of Yahoo is about its Asian assets, the cash it has now and will shortly receive thanks to the Alibaba stake and how it will deploy that money to the benefit of shareholders.

That is a very foggy road ahead for Yahoo stock investors… but hey, at least it’s not a road that leads over a cliff like the core U.S. advertising business.

Related Reading on Yahoo Stock

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

Get The Slant delivered to your inbox every day!

Comments