Yahoo investors have waited for years for Alibaba’s IPO, expecting that the public value of the Chinese giant’s stock that Yahoo owns might send Yahoo’s stock into the stratosphere.
In the early hours following Alibaba’s debut, Yahoo’s stock is getting smashed. Some of the selling pressure may be from Yahoo owners who owned it as a way of gaining exposure to the private Alibaba — who are now dumping Yahoo stock and buying Alibaba’s instead. Other traders may be shorting Yahoo to bet against Alibaba. And still others may have owned Yahoo just for the Alibaba pop and are now taking their winnings and going home.
Regardless, a sum-of-the-parts analysis suggests that the market is now valuing Yahoo’s actual business at less than zero.
Yahoo stock opened the day at $US42.40 per share. It’s currently down ~5% to $US40.23 per share. This puts Yahoo’s market capitalisation at $US40.01 billion.
Here’s the maths for figuring out the value of Yahoo’s core:
- Start with Yahoo’s $US40 billion market cap.
- Subtract the $US10.5 billion in cash that Yahoo will have after receiving the proceeds of its Alibaba stock sale and paying taxes on its gain (Yahoo won’t have to pay these cash taxes for a while, so it will retain the cash for now).
- Subtract the value of Yahoo’s 35% stake in Yahoo Japan. It’s worth about $US5 billion after taxes.
- Compute the value of the 401 million shares in Alibaba that Yahoo still owns, which is worth about $US25 billion after taxes with Alibaba trading at $US90 per share.
What you’re left with is the value the market is attributing to Yahoo’s core business: About -$500 million with Alibaba trading at $US90.
Yahoo has about a billion shares outstanding. If each are going for $US40, Yahoo’s core business makes up less than $US0 of that price — theoretically, -$.50 per share.
It’s a shockingly low valuation for Yahoo’s core business.
Yahoo’s core business still generated nearly $US4.62 billion of revenue in the last twelve months and $US772 million in EBITDA. That business is worth is lot more than zero.
Another way of thinking about it: If someone were to step in and buy Yahoo today, they would be able to sell the company’s stakes in Alibaba and Yahoo Japan, pay for the acquisition entirely, and start profiting from Yahoo’s core business immediately.
The company is obviously now an attractive acquisition target.