Skip to Content
Stock Strategist

Alibaba IPO Not Necessarily a Treasure Trove for Yahoo

We're not convinced the share sale proceeds will be reinvested wisely.

Mentioned: , , ,

We have erred on the side of caution in the past with respect to  Yahoo's (YHOO) ability to realize value from its holding in Alibaba Group (BABA), which came public Friday. We believe Yahoo has primarily been a vehicle for investors to participate in Alibaba's potential upside, but we have historically provided a margin of safety to account for valuation risk, the uncertainty of the timing of an initial public offering, and the potential for return of capital to Yahoo shareholders. On the basis of the now-completed IPO and our fair value estimate of $90 per share for Alibaba, we have revised our fair value estimate for Yahoo to $42 per share from $39. We still do not see a compelling reason to recommend the shares of narrow-moat Yahoo, particularly based on our belief that the firm is disadvantaged versus the richer advertising platforms of Facebook (FB) and Twitter (TWTR).

Our largest concern with respect to the potential liquidity of Alibaba for Yahoo shareholders is the lack of opportunities for Yahoo to invest in high-return projects. Yahoo was to sell nearly 122 million shares in the offering and retain a 16.3% ownership interest in Alibaba Group. While we are giving Yahoo full credit for the Alibaba shares that are to be sold, we are taking a 20% haircut from our Alibaba fair value estimate of $90 to account for our concern that the shares are not reinvested wisely. If we did not take a haircut, our Yahoo fair value estimate would be $47. Still, we prefer to be cautious, since the turnaround in Yahoo's core business has been slow to materialize.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.