Note: This analysis was written when Yahoo was trading at around $11/share.The starting point of our analysis is a story that has gone largely unnoticed: why did Yahoo turn down Jack Ma’s offer to buy back 15% of Alibaba Group for $3.5B, which would value the entity at $23.5B, which would imply $7+ per share for Yahoo’s stock?
We think the answer is that Alibaba Group, and in particular its TaoBao business unit, is worth much more than that amount. Investors talk about getting Yahoo’s core business “for free” by buying the stock. We have a different take: we value Yahoo’s core business at 2.5x EBITDA and we think that investors get TaoBao for free.
- Yahoo has $2.50/share in cash
- Yahoo Japan is worth $5/share (in a tax efficient spin-off, we assume Yahoo Japan is worth $4.00 per share)
- Yahoo’s 40% interest in Alibaba Group’s stake in Alibaba.com (publicly traded) is worth $1.35/share, which we discount to $1
So that’s $7.50 from those 3 items. We assume Yahoo’s stake in Alipay is worth about 50 cents per share (based on the IPO range given in the settlement) and YHOO’s core business is worth 2.5x EBITDA or roughly $3 per share. That totals $11, which is roughly Yahoo’s current price.
So investors are basically getting TaoBao for free. More merchandise was sold on Taobao last year than on eBay. More payments were processed on TaoBao (via Alipay) than on PayPal globally. TaoBao has 370 million registered users, 70% China market share in C2C e-commerce in China, and 30% China market share in B2C commerce (#1 rank). China e-commerce is growing 80%+ y/y.
For TaoBao’s valuation, we came across one good comp which didn’t get much attention:
- DST, Tiger Global and the Walton family recently led a $500M financing round for 360buy.com, which valued the company at $10B
- Based on market share research, TaoBao’s market share of overall e-commerce in China is at least 3x the size of 360buy.com’s
- Using 360buy.com as a comparison would put TaoBao’s value at $30B, which would imply $9 per share for YHOO
Given TaoBao’s dominant market share, another comp we consider is Baidu:
- 2010 Baidu revenue was $1.2B, +79% y/y
- 2010 Alibaba Group (which is driven primarily by TaoBao) revenue was $1.6B, +84% y/y
- Baidu is currently worth $50B. TaoBao is worth… ?
We don’t view the Alibaba Group stake as something Yahoo needs to sell off and pay taxes on in order to generate cash. That seems backward to us, selling your best business to fund your weakest one. Instead we think Yahoo’s stake is so valuable that an acquirer will come in and just take out Yahoo for that reason.
Three suitors that make sense to us:
- Jack Ma and his investor group (already tried for 15% of Alibaba Group at $3.5B)
- Microsoft (already tried, has search agreement in place w/ Yahoo, and at Microsoft’s size, it takes a lot to move the needle… getting 40% of the hottest internet company in China has to look attractive)
- Amazon (synergies w/ AMZN’s massive global e-commerce platform)
The Carol Bartz discount being applied to Yahoo right now is unbelievable.