I have little hope that Yahoo Inc. will be a long-term success in the Internet space, and only a bit more faith that chief executive Marissa Mayer and its leadership team can figure out a way to prove me wrong.
And yet I became a Yahoo shareholder this summer. That's because I'm much more excited about Alibaba Group Holding Ltd.
Yes, I know I'm not alone. The imminent Alibaba IPO is pretty much all anyone is talking about, at least on days that Apple Inc. isn't doing a big product reveal. But even with the remarkable numbers you're seeing – an offering of $23-billion (U.S.) or so, a market value of $150-billion – Alibaba may be underappreciated. And so may Yahoo, even after a 20-per-cent gain over the past few weeks.
To review, this is the third time I've looked at Yahoo here at VOX. In October, 2012, at the time of Ms. Mayer's appointment, I suggested there was "new hope" for the core Yahoo business, and its Asian properties – its Alibaba stake and a position in Yahoo Japan — "acted as a buffer for investors who want to buy in cheaply and see if Ms. Mayer might actually improve Yahoo."
Over the next five months, shares jumped 50 per cent, from $17 to $26, and I sounded a note of caution: "A closer look suggests the case for Yahoo stock is built largely on the frothy valuations of Chinese Internet stocks," I said.
Well, one thing still hasn't changed. With Yahoo now above $41, its core business is still getting valued at little or nothing. Given that revenue and operating profits are in decline, investors' lack of enthusiasm for legacy Yahoo is understandable, even if startup brands with a fraction of Yahoo's customer base are getting sold for billions of dollars.
Something is different now, however: I'm not about to call Alibaba's valuation "frothy." I've gotten a soft spot for companies with nosebleed valuations – if they've got dazzling prospects. I think Alibaba qualifies.
As you've likely seen, Alibaba's collection of Chinese e-commerce websites and mobile apps moves more merchandise than Amazon Inc. and eBay combined. Because it collects fees, rather than sell the goods itself, its revenue looks small. But its profits over the past 12 months – $4.8-billion in EBITDA, or earnings before interest, taxes, depreciation and amortization – are large. (Still content to spend away all your earnings in the name of "investment," Amazon?)
Here's the thing: There are plenty of companies in the world that make as much money as Alibaba. There are others that are growing as quickly. Almost none are as big and fast. I searched the 21,000 public companies in this world listed on Standard & Poor's Capital IQ to find the number that have $4-billion in EBITDA, have grown sales by 50 per cent in each of the past two years, and doubled EBITDA in each of those two years (the Alibaba profile). There were two: an Indian oil and gas company called Sesa Sterlite Ltd. and a concern you may have heard of named Facebook.
So while some people say the idea of $150-billion for Alibaba is absurd and augurs a top for the market or the peak of a new tech bubble, I think it's more likely the first step in a long climb.
So, back to Yahoo: The company owns about 523 million Alibaba shares now and will sell as many as 140 million in the IPO. If we take the midpoint of Alibaba's stated $60 to $66 range, I calculate that Yahoo's current Alibaba stake is worth a little more than $33 per Yahoo share. (Yahoo's stake in Yahoo Japan is worth about $7.50 a share.)
At the top of the range, Yahoo will gross a little more than $9 per share, before taxes, on the shares sold in the IPO. A 10-per-cent bump in Alibaba, to $72, gives Yahoo almost $28 per share in Alibaba stock. Every extra dollar in Alibaba's share price adds 40 cents per Yahoo share to the value of Yahoo's stake.
So I'll watch with interest as investors put a price on Alibaba. And pay very little attention, in the short term, to what Yahoo is actually accomplishing in its long-standing attempt at a turnaround.
David Milstead