Yahoo! Inc. (NASDAQ:YHOO) stock is expected to close its transaction to sell its core Internet business to Verizon Communications Inc. (NYSE:VZ) for $4.8 billion in the first quarter of 2017. The tech giant will become a publicly traded investment company (temporarily referred to as RemainCo), which will hold YHOO stock’s remaining assets including its cash, convertible notes, stakes in Alibaba Group Holding Ltd (NYSE:BABA), Yahoo Japan Corporation (TYO: 4689), and non-core patents after closing the sale. (Source: “Verizon to acquire Yahoo’s operating business,” Yahoo! Inc., July 25, 2016.)
Since announcing the deal, YHOO stock traded from to $38.22 to $44.36 per share on Thursday, gaining more than 15% in value. Will Yahoo stock continue to surge over the next two quarters or until the closing of the transaction? Will RemainCo find itself in a bright spot after the sale of its core business? The answer to both questions is yes.
Technical indicators support an uptrend for YHOO stock. The company has strong fundamentals going forward, based on its financials. Its total assets are significantly higher than its total liabilities as of June 30, 2016.
Yahoo Stock Ends 2Q in Sound Financial Position
Based on its balance sheet, YHOO stock’s total assets were $44.21 billion; total liabilities were $13.12 billion; total current assets were $7.6 billion; and total current liabilities were $1.28 billion by the end of the second quarter. Its cash, cash equivalents, and marketable securities were $7.7 billion by the end of the period.
The technology company’s management has been focused on its free cash flow, which increased from $18.02 million in the third quarter of 2015 to $426.0 million in the second quarter of 2016. Its capital expenditures were $157.0 million through the first half of this year, down by around 43% year-over-year. Yahoo’s board and management have been working hard to be good fiduciaries by exploring different strategic options to maximize shareholder value.
RemainCo Will Still Hold Huge Amount of Yahoo Stock Assets
The value of the assets that will be held by RemainCo is still tremendous. Yahoo’s stake in Alibaba has an estimated fair value of $30.5 billion and its shares in Yahoo Japan are worth $8.9 billion. The combined value of its equity investments in both companies was almost $40.0 billion by the end of the second quarter.
The company received $157.0 million in cash dividends, net of withholding taxes, from Yahoo Japan in the three and six months ended June 30, 2016. Yahoo stock has other modest minority investments to monetize, such as Hostonworks Inc (NASDAQ: HDP) equity securities and warrants with an estimated fair value of $41.11 million and 37.42 million, respectively, during the period. (Source: “Form 10-Q, Yahoo! Inc., August 8, 2016)
The executives of the company indicated that RemainCo could hold its shares in Alibaba and Yahoo Japan “indefinitely” if the board decides to do so. They intend to preserve the pre-tax value of Alibaba shares.
Yahoo created Excalibur LLC to explore the divestiture of its more than 4,000 non-strategic pending patents and applications. Yahoo’s CFO Ken Goldman, says there is a keen interest for the Excalibur portfolio, and that Yahoo is looking at the best way to maximize its value. He also emphasized that they are “very good at monetizing” the company’s patents; around $700.0 million over the years.
Goldman stressed that the board is focused on returning cash to shareholders in the most tax-efficient way.
The overall value of RemainCo is still uncertain, but it is obviously significant. Right now, investors are particularly focused on the Alibaba stake. BABA stock is performing well; up 60% over the past year or more than 26% year-to-date.
YHOO stock continues to generate huge returns for shareholders from its investment in Alibaba. Yahoo stock originally invested $1.0 billion for a 40% stake in Alibaba in 2005. It still owns 384 million shares of BABA stock, which closed at $102.57 per share on Thursday, September 8. Therefore, its stake is now worth around $39.0 billion.
The Bottom Line for YHOO stock
Yahoo shares are undervalued and are currently trading at a discount to intrinsic value. The tech company’s present market value is around $42.0 billion. Just looking at the estimated value of its investments in Alibaba and Yahoo Japan, you can quickly determine that it is worth more than its current valuation. There is a significant opportunity for YHOO stock to trade higher. Wall Street analysts covering Yahoo stock have a consensus forecast that it would outperform the market and could reach as much as $53.00 per share, an increase of 19.5% over the next 12 months.