Yahoo! and Sina: Which Has the Most IPO-Related Upside?

Yahoo! (NASDAQ: YHOO  ) and Sina (NASDAQ: SINA  ) have large stakes in two high-profile companies, Alibaba and Weibo, which will soon be initial public offerings. However, following the divestments of Alibaba and Weibo, which stock has the most upside potential?

The highly anticipated IPOs
Alibaba and Weibo are two very different Chinese companies that will soon trade on a U.S. stock exchange.

Alibaba is an e-commerce giant that The Wall Street Journal recently described as a "mix of Amazon, eBay, and PayPal, with a dash of Google thrown in." It is expected to be the largest U.S. stock listing ever for a Chinese company, raising $15 billion, with a market cap north of $130 billion.

Weibo is the quintessential high-growth social media company, perhaps best described as a mix between Facebook and Twitter. Also, like Twitter and Facebook, Weibo is expected to carry a lofty multiple, having 12-month revenue of just $188 million and expected to raise $500 million, giving it an expected market cap of near $5 billion.

Are Alibaba and Weibo fairly priced?
It might be hard to fathom, but compared to many of Alibaba's and Weibo's peers, both are entering the market somewhat attractively priced.

For one, Alibaba generates the majority of its revenue and profit through selling advertising rights to its 7 million sellers, which created transaction volume of $163 billion last year. In the third quarter of last year, Alibaba generated a profit margin of 44.6% to earn net income of $792 million, and in 2014 net income is expected to top $3.5 billion.

In comparison, eBay (NASDAQ: EBAY  ) earned $2.86 billion last year in net profit and trades at 26 times earnings. If we apply a 26 times multiple to Alibaba's 2014 profit expectations, then we get $91 billion, not quite its implied IPO value. However, growth is the difference, as eBay's marketplace is growing at a 12% annual clip while Alibaba is generating 50% growth, meaning the premium is based on future growth, not current.

As for Weibo, its $188 million in revenue implies a 26.5 times sales multiple. In comparison, Twitter (NYSE: TWTR  ) trades at 42.5 times sales. Furthermore, Twitter's 2013 revenue growth of 110% was very impressive and a staple for longs who justify its pricey valuation, but Weibo's revenue nearly tripled last year and outpaces Twitter by a lofty margin.

Two cash-generating IPOs
With all things considered, the growth value added to Alibaba and the growth of Weibo implies that both stocks could see a very nice pop on the day of each company's IPO. Even a 25% IPO pop would imply valuations of $150 billion and $6.25 billion for Alibaba and Weibo, respectively, which is very good for Yahoo! and Sina.

Company

Investment

Stake

Value

High Tax Rate

Net Cash

Yahoo!

Alibaba

24%

$36 billlion

35%

$23.4 billion

Sina

Weibo

71%

$4.43 billion

25%

$3.32 billion

The above chart shows that both Yahoo! and Sina are positioned to reap extreme benefits from the IPO of Alibaba and Weibo; both companies are expected to offer shares and divest their investments. In fact, if we incorporate both company's current cash position, we can conclude that cash will account for 67.5% of Yahoo! and 112% of Sina's current market capitalization.

Yahoo! and Sina: Home-run investments for the future, right?
To most, Yahoo! and Sina would appear definite buys given the cash that both companies are soon to accrue following these IPOs. There are, however, some doubters.

For Yahoo!, it generated operating income of only $590 million last year, meaning more than half of its $1.366 billion net income came from equity interest in Alibaba and its Japanese asset. Then, with expected revenue growth of only 1.5% for 2014, some are worried that Alibaba is fully priced into Yahoo!

For Sina, the bear case is much more difficult, seeing as how its cash position will exceed its market capitalization. However, with Sina growing 43% in its last quarter, generating revenue of $197 million, approximately $43 million of its $58 million in year-over-year revenue growth came from Weibo. This means that without Weibo, Sina's year-over-year growth will be in the single digits.

The easy answer
While bears make good points in regards to both Yahoo! and Sina, the answer to these questions is cash!

Both companies will have enough cash to buy growth, and in Sina's case, it could buy its equivalent. For Yahoo!, sure, its year-over-year net income will fall following the divestment of Alibaba, as will margins. Yet Yahoo!'s market capitalization minus cash will be $12.9 billion, which translates to 21.8 times operating income.

While this is a small premium relative to the rest of the market, investors must remember that not many companies have a cash position worth nearly 70% of its entire market capitalization. This means that like Sina, Yahoo! can afford to make future investments, purchase start-ups, acquire peers like AOL, buy back stock, or pay massive dividends. In the end, it's these things that add value.

Final thoughts
Yahoo! and Sina will undoubtedly benefit from their investments in Alibaba and Weibo, but given the likely IPO pop in both companies, Yahoo! and Sina's stake, and the investment concerns, Sina looks to be the best bet between it and Yahoo!

Sina will have more than $1 in cash per $1 of market capitalization, which is unprecedented, and is a result of capitalizing on the current value and demand of the fast-growing but fundamentally small Weibo. This kind of cash delivers the ability for Sina to grow rapidly with acquisitions and investments while providing investors with a high level of safety in its business.

Therefore, with Sina surprisingly trading with a 17% loss this year, the stock looks poised to soar before, during, and after Weibo's IPO.

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  • Report this Comment On March 19, 2014, at 7:37 PM, SinaChixnDina wrote:

    Brian,

    Three comments:

    Weibo will raise much more then $500 Million. They simply used that amount in their IPO filing to determine registration fees. Very common.

    Not sure how you got to your valuation on Weibo, but many analysts see it as high as $9 billion

    You did not mention anything about SoftBank which owns 37% of Alibaba. What do you expect from that stock?

    Thanks

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