Finding Value in YHOO Stock
If you’re like most investors I know, Yahoo! Inc. (NASDAQ:YHOO) is probably an important part of your life. Not YHOO stock necessarily, but products that make up the firm’s “core business,” like Yahoo! Finance.
It doesn’t matter if you’re a hedge fund manager or if you have only a passing interest in stock investing, most people end up on Yahoo! Finance at one point or another. In fact, I’ve never met an investor who hasn’t used Yahoo! Finance.
Under the normal rules of technology investing, that should make Yahoo! Finance a very valuable property. The web site has a monster-sized audience, many of whom still land on the home page. Believe me, I know that from first-hand experience.
My articles used to appear on Yahoo! Finance and if one would hit the homepage, its visibility instantly shot through the roof. Seriously, the number of views would catapult by several orders of magnitude. I was in awe of how many people visit Yahoo! Finance.
That kind of dedicated readership is what tech investors usually look for in digital properties. For some reason, though, these same investors currently think Yahoo is worth nothing at all.
Actually, it’s even worse than that—they think its value is less than nothing.
Let me explain…
Although we’re all familiar with brands like Yahoo! Finance or Tumblr, they’re just a fraction of the company’s business. We call them its “core business.”
The company has two other divisions: Yahoo! Japan and its stake in Alibaba Group Holding. Yes, that Alibaba. Yahoo invested $1.0 billion in the company when it was just a fledgling startup. In 2012, Yahoo sold some shares back to Alibaba for $7.6 billion.
As of right now, Yahoo’s stake in Alibaba is worth roughly $30.89 billion. The Japanese arm of the company adds another $8.7 billion in value and the firm has $5.98 billion in cash. That’s a pre-tax valuation of $45.57 billion, without the “core business.” (Source: “Yahoo Is Looking for a New Way Around Alibaba Taxes,” Bloomberg, December 2, 2015.)
Um, wait a second… Yahoo currently has a market capitalization of $35.61 billion. Does that mean the “core business” is worth -$9.96 billion? That doesn’t make any sense.
Spinning Off Yahoo’s “Core Business”
Yahoo’s CEO, Marissa Mayer, planned to sell the firm’s stake in Alibaba last year, but she couldn’t get the Internal Revenue Service (IRS) to fast-track a tax exemption for the sale. No one wants to pay 38% tax on that profit, so she decided to sell the “core business” instead.
Truth be told, she was bullied into that decision by major YHOO stockholders.
In any case, the “core business” is up for auction. It has drawn three bids from private equity firms: one from TPG Capital, one from Advent International, and a joint offer from Vector Capital and Sycamore Partners. AT&T Inc. and Verizon Communications Inc. also put in offers.
They all want a shot at monetizing Yahoo’s “core business” because the profits could be enormous if done right. After all, Yahoo’s brands have more than one billion monthly active users, which is a pretty big lure for advertisers. (Source: “Yahoo Is Making ‘Great Progress’ on Sale, CEO Says,” Fortune, June 30, 2016.)
But what’s with the negative valuation? The speculation is that Yahoo could fetch anywhere between $3.4 billion and $8.0 billion for its “core business.” How can the market simply ignore that? Should the stock price surge on those rumors?
Well, yes. There’s obviously some discount for taxes, but we have no idea what the relevant tax rate should be. In any case, there’s a ton of evidence that the market is grossly underestimating the value of YHOO stock.
After all, with more than five potential buyers, there’s probably going to be a bidding war over the “core business.” Yahoo could end up scoring a huge win with this sale, because it’s more valuable in parts than as a whole. That’s counterintuitive, but correct.
I’ve been on the record saying this for months now. When Yahoo officially announces the deal, its share price is probably going to surge, but not because of random optimism.
The simple fact is that YHOO stock hasn’t priced in the true value of Yahoo’s “core business.” The share price is trading absurdly low and anyone who uses Yahoo! Finance on a daily basis should know that.