Yahoo (YHOO) has rolled back a little in 2014, down almost 10% since New Year’s Day, but it’s still awfully close to levels not seen since the dot-com days. YHOO stock is up 87% since January 2013 after the rollback, almost three times the 34% return for the S&P 500 in the same period.
The question for traders, then, is whether YHOO stock is simply taking a breather before it powers to new 14-year highs … or losing momentum after its brisk run-up in the last year.
It’s hard to tell.
I have been bearish on Yahoo stock for some time (most recently in January), and the Internet company has proven me wrong repeatedly on its march higher. But I remain convinced that YHOO has its best performance behind it. Here’s why:
YHOO Stock: No Value From Core Business
The sad reality is that the domestic internet business of Yahoo is worthless — literally.
The biggest chunk of the company’s valuation goes to its current stake in Asian Internet giant Alibaba, which is set to go public later this year at a valuation north of $150 billion. Yahoo has a 24% stake in Alibaba, and therefore has about $36 billion in value from the holding.
But wait. The total market cap of YHOO stock is just $37 billion. So … is Wall Street saying the rest of the company is only worth $1 billion?
Actually, it gets even worse when you dig into what else Yahoo owns. Yahoo also has a 35% stake in Yahoo Japan (YAHOY), a separate publicly traded company that is distinct from the U.S. business led by CEO Marissa Mayer. That company is valued at a current market cap of almost $28 billion, meaning a roughly $10 billion stake for YHOO there.
So let’s do the math: $36 billion from Alibaba + $10 billion from Yahoo Japan = $46 billion.
Yahoo’s current market cap is $37 billion. So, $37 billion – $46 billion from Alibaba and Yahoo Japan = -$9 billion for everything else.
Everything Riding on the Alibaba IPO
Some investors might argue that this is unfair, given that Yahoo has $3 billion in the bank and continues to make acqusitions such as the $1.1 billion purchase of Tumblr in 2013.
However, while there is surely something of value right now in the domestic business of Yahoo, Wall Street remains convinced that the future value is ugly. Consider yet another revenue decline reported by YHOO in its recent earnings report this January, proving that the slowly dying “portal” of Yahoo.com is making a little less money every day.
If Alibaba’s IPO doesn’t go off as successfully as some hoped — which is a very real possibility now that some analysts are cooling on the deal — that could depress the $36 billion stake that’s propping up share prices for YHOO stock investors.
And considering the negativity on other areas of the business, losing Alibaba’s sentiment-driven momentum could be a killer.
Many investors are clinging to hopes of a big-time special dividend when Alibaba does go public and Yahoo unloads some of its stake. While I can see the logic in that for shareholders with a good cost basis, I don’t see the logic of buying today now that the Alibaba IPO has already been baked into shares and expectations are high.
Besides: After the stake is gone and the biggest store of value has been depleted, what’s to keep YHOO stock from falling apart?
Don’t Fall for Marissa Mayer’s Spin
Amid all this, Wall Street darling Marissa Mayer has tried to spin a tale of turnaround and growth at Yahoo.
Don’t believe it.
While Yahoo continues to spend freely on crazy mobile startups, there is no material impact to be seen on the bottom line from these moves.
Take the latest effort, a $300 million offer to purchase video service provider Network Distribution News. The online video syndicator is a move to prop up video advertising, which remains the last bastion of recent online advertising rates.
Is that going to right the sinking ship? No way … but I guess it will help YHOO bail water a little bit faster.
Same for all the mobile acquisitions and even the big-time Tumblr buy. The biggest problem facing companies like Yahoo and AOL (AOL) is that ad rates are dropping and traffic is flat at best, and there’s simply no way to spackle over that with talk of a companywide evolution.
The bottom line is that YHOO stock is Alibaba or bust.
If you’re a current stockholder, maybe stick with it … but new money shouldn’t risk it.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.