What's Next For Yahoo! (YHOO) After The Alibaba IPO?
Zacks Investment Research | Sep 17, 2014 12:40AM ET
Yahoo! Inc (NASDAQ:YHOO) is a global technology company. Through the company’s technology, Yahoo! delivers digital content and experiences around the globe. The company provides online services to users, as well as a range of marketing services designed to connect with those on Yahoo! and through a distribution network of affiliates.
These affiliates integrate its advertising offerings into their Websites or other offerings. The company generates revenue from display ads, search advertising, and other sources.
Yahoo Stock Prospects
Yahoo is really in focus thanks to Chinese e-commerce goliath, Alibaba Group Holding Ltd. This company is planning to launch its IPO on the NYSE on Friday, the 19th September and is arguably the hottest public offering of the year. It is expected that Alibaba Group Holding Ltd. starts trading with the symbol of “BABA”, and it is also hypothesized that the stock price will be around $66/share.
Currently, YHOO owns approximately 22.5% of Alibaba, and therefore YHOO is looking for Alibaba for momentum and support, and possibly, a windfall of money. It is estimated that if YHOO proceeds to sell the shares it is expected to own, the firm will generate about $8 billion cash.
Many investors and traders have been seeking to capitalize on the Alibaba IPO through purchasing shares of YHOO and holding Yahoo! shares in their portfolios. However, there are many concerns and doubts regarding YHOO’s CEO Marissa Mayer position on what she will have the company do with the staggering amount of money raised. Alibaba (NYSE:BABA) is expected to have a valuation approaching $160-$200+ billion following its IPO, and it might be the largest IPO in history.
This is not too farfetched, as China’s economy has been racing forward exponentially, and China’s middle class has been burgeoning over the past decade or so, which allows for a rapidly growing consumer market in China, allowing for more e-commerce company startups.
The point is that Alibaba is definitely going to be big, and there will be challenges for the IPO underwriters if they are to keep the shares up on the first day. Every investor and trader is going to want to put his hands on shares of Alibaba once the stock debuts, however, not to be pessimistic but it appears unlikely that retail investors will be able to grab a slice of Alibaba anywhere close to the target IPO price.
The solution for many retail investors is to purchase shares of YHOO, a backdoor to Alibaba. Since YHOO owns a substantial stake in Alibaba, many have sought to predict what will happen to YHOO, as well as its stock. Will Alibaba purchase YHOO, in what will be an enormous merger and acquisition? Not very likely, because YHOO does have the potential to grow on its own and Marissa Mayer needs to give good prospects for the company in the upcoming conference call.
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Alibaba will probably not buy YHOO, unless Jack Ma feels that YHOO really does add something of value to his company. YHOO needs to start spending that windfall money on some new product. YHOO is growing, but it is not transforming. That is YHOO’s weakness; YHOO needs to innovate, and yes, the company has been doing well by beating almost all Zacks ESP Earnings Estimates, according to the EPS Surprise History Chart.
How will YHOO use the windfall of cash from Alibaba’s IPO? Many activist investors will pressure Marissa Mayer to start becoming more aggressive, and pushing more into the market, beyond advertisements. YHOO needs to invest some deep pockets in research and development, but no one knows for sure what’s going to be done with the ton of cash YHOO will have. Mayer needs to turn around YHOO, and she may not have the luxury of time to do so.
To be fair, Mayer, has been committed to a few acquisitions since she became CEO of Yahoo! Acquisitions in 2014 alone consisted of Aviate, Clarity Ray, Flurry, and Luminate Inc. YHOO is valued at around $39 billion, with a market capitalization of $41.04 billion, which means that YHOO’s stake in Alibaba (approximately $45 billion) is worth more than YHOO, the company itself.
This suggests that the abnormal volume of shares traded that we have been seeing the past couple of days is mostly due to the Alibaba hype. YHOO is not the best value stock to invest in, as it currently has a 38.74 forward P/E ratio, far higher than the industry’s average of 6.50.
Yahoo’s Financials
YHOO’s financials have been decent for the time being, and YHOO has most definitely capitalized on the Alibaba investor craze, pushing YHOO’s stock price higher for the past few weeks. It is important to note that YHOO does not pay any dividends to its shareholders; however, there are rumors that YHOO may want to start paying its shareholders since the company will experience a glut of cash.
Some say that YHOO will give out a onetime huge cash dividend to its shareholders, something many people are hoping for, but nothing has been confirmed thus far. As of (12/31/2013), YHOO managed to generate sales worth $4,680 million, a gross profit worth $3,331 million, and a positive net income of $1,366 million. YHOO maintained a positive diluted net EPS of $1.26/share last year.
The Zacks consensus Estimate Trend Estimate estimates that for the current year (12/2014), YHOO will have $1.06/share EPS. YHOO also seems to be able to surprise EPS estimates on a consistent basis, with a 12.38% surprise average. Analysts have also consistently revised and decreased their EPS estimates for the current year from $1.32/share to $1.06/share, 90 days ago. YHOO is currently ranked a Zacks Rank #5 (Strong Sell), and the stock has an Earnings ESP of 0.00%, and an EPS surprise last quarter of 0.00%.
Bottom Line
We suggest investors exercise serious caution when investing in a volatile stock like YHOO, and swing trading may be their better option. We cannot advise on when investors and traders holding on to YHOO should sell their shares, however, it seems likely that YHOO’s stock price will continue to rise in the short term, as investors continue to go gaga over Alibaba’s IPO, perhaps hitting the $45/share benchmark.
Selling shares of YHOO right before the IPO may prove safer as well as more profitable, as demand for YHOO may not last for too long once Alibaba shares are there for the taking by the average investor.
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