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Yahoo! Inc: A Buy on the Alibaba IPO?

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The highly anticipated IPO of Alibaba is right around the corner, and its early investor, Yahoo! is set to gain from the event. Yahoo! will not only be cash rich by selling stock in the IPO, but the company will also be holding onto a chunk of its Alibaba stake, which will aid Yahoo!'s bottom line. This is good news for shareholders as this will help drive the stock.

Impact on earnings
Yahoo! will be selling 10% of Alibaba in the public offering, which is set to take place in the latter part of the year. And Yahoo! will be keeping a 14% stake in Alibaba, which will help its earnings growth. In the last few years, earnings from its two major holdings, Alibaba and Yahoo! Japan, have been a major contributor to the company's earnings per share. In 2013, Yahoo!'s earnings from these two major equity holdings increased 33% to $897 million, which represents 65% of its 2013 net income.

So when Yahoo! sells a sizable portion of its stake in Alibaba, its diluted EPS will get a big boost in 2014. And as Alibaba becomes more valuable, Yahoo!'s fortunes will also increase.

Alibaba saw its revenue grow more than 50% in the last quarter and has a net income margin of around 45%. In addition, Alibaba is making investments in emerging technologies as it made a $215 investment in a rapidly growing mobile messaging service, Tango, which boasts of more than 200 million registered users.

Deployment of excess cash
Yahoo! already has a $5 billion share buyback authorization in place. And the company will likely use that cash to invest in its organic growth projects as well as make acquisitions. If Yahoo!'s cash inflow, from the partial Alibaba sale, is greater than expected the company might opt to increase its buyback program further.

In 2013, Yahoo saw its user base grow substantially to 800 million monthly users, and the mobile user base has surged to 400 million. But the revenue of Yahoo! hasn't followed the growth in its user base. Display advertising revenue declined 9% in 2013, and search advertising revenue declined 8%.

In addition, Yahoo's search partnership with Microsoft  (NASDAQ: MSFT  )  will see contractual changes, which might impact its search revenue. Microsoft gave a revenue per share, or RPS, guarantee in the U.S. for which it made fixed payments to Yahoo! to power its search engine utilizing Bing. But Yahoo! agreed to waive any future RPS guarantee payments from all markets except Taiwan and Hong Kong after first quarter of 2014. So this amended agreement might be a headwind for Yahoo!'s search revenue growth. 

So a more optimal usage of cash received from Alibaba would be to invest more in core business to monetize its increased traffic base, and generate more interest from advertisers across various Yahoo! properties, both on the PC and mobile. 

Going forward
The listing of Alibaba in the public equity markets is a big positive for Yahoo! shareholders. The company will be able to monetize a large chunk of its holdings during the IPO and at the same time take part in future growth of Alibaba's revenue and earnings growth. Yahoo! profits should get a major boost in 2014 and 2015, as the company receives proceeds from the sale, invests in its core businesses, and buys back shares.

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Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

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  • Report this Comment On March 25, 2014, at 7:36 PM, danialwilson wrote:

    Investors seem to be buying into Yahoo to gain exposure to the Alibaba Group, but the company’s success initiative is already priced in and the stock price has surged recently.

  • Report this Comment On March 25, 2014, at 7:45 PM, Kelly15 wrote:

    Yeah.. That will effect the Yahoo Stock Holders and.. Of course it`ll be beneficial and will make high impact on earnings.

  • Report this Comment On March 25, 2014, at 7:51 PM, emilyrobins wrote:

    Inevitable cash infusion is good news for Yahoo.

  • Report this Comment On March 25, 2014, at 8:07 PM, jodinajoseph wrote:

    In Alibaba’s second quarter fiscal year 2013 reported that its total revenues were up 61% year over year to $1.74 billion, while net income swelled 145% to $717 million as the company continued expanding

  • Report this Comment On March 26, 2014, at 2:24 PM, annaarron wrote:

    Yahoo has gone through a number of acquisitions taking over smaller companies to appropriate their technology and talent. And since then the company's stock has surged more than 150% ever since then.

  • Report this Comment On March 26, 2014, at 2:43 PM, annaarron wrote:

    Yahoo’s gross revenues over the five-year period subsequently declined at an average annual rate of 6.5%.

  • Report this Comment On March 27, 2014, at 5:30 PM, hennrymark70 wrote:

    Yahoo acquired a 46% stake in Alibaba in October 2005. The Chinese e-commerce company has since grown into one of the largest e-commerce platforms in the world

  • Report this Comment On March 31, 2014, at 10:08 AM, malcolm107 wrote:

    Which UK companies are selling shares in the Alibaba IPO ? I cannot find any.

  • Report this Comment On September 16, 2014, at 3:45 PM, jargonific wrote:

    Anyone getting ready to buy the Alibaba IPO or BABA should read this carefully for the down side FROM the company itself, See: The Massive Number of Risk Disclosures in the Alibaba IPO Filing - Yahoo! (NASDAQ:YHOO) - 24/7 Wall St.

    Alibaba is set to be under further control of Jack Ma and affiliates and parties tied to him. The company has an offshore structure that makes it much harder for shareholders to enforce legal and structural rights. The company is also expected to have a market capitalization rate of roughly $160 billion.

    As we noted last Friday, Alibaba founder and CEO Jack Ma is selling 12.75 million shares and was shown to be reducing his Alibaba stake to 7.8% from 8.8%. Yahoo! Inc. (NASDAQ: YHOO) is selling 121.74 million shares, reducing its stake from 22.4% to 16.3% — said to be slightly lower in shares being sold than originally expected. The other major shareholder is Japan’s SoftBank, which owns 797.74 million shares (34.1%) and is selling none of them.

    Alibaba will have 2,465,005,966 ordinary shares outstanding after this offering (versus 2,341,929,035 ordinary shares outstanding immediately prior to this offering). The company showed in the filing that the number of ADSs outstanding immediately after this offering would be 320,106,100 (or 368,122,000 ADSs if the underwriters exercise in full their option to purchase additional ADSs), not including 128,417,070 of its ordinary shares, representing 5.2% of the outstanding ordinary shares immediately after this offering, that will not be subject to lock-up agreements and may be freely converted into ADSs from time to time.

    The labeled “Risk Factors” section of the latest S-1/A filing made other such sections in questionable IPOs look short and conservative. This Risk Factors section is close to 44 pages, if you back out what would be a short final page. We thought that Facebook had a long list of IPO disclosures under its Risk Factors section, but that was “only” 22 pages. Alibaba has twice that much.

    (and on p2)

    Difficulty In Monetizing Mobile

    If as we experience increased use of mobile devices for mobile commerce we are unable to monetize that increased use, our business may not grow or could decline, and our revenues and net income would be materially reduced. For instance, to date we have chosen not to display as many marketing impressions on our mobile apps as compared to on our personal computer-based websites. Although we do not believe the increasing use of mobile devices to conduct commerce has had an adverse effect on our business, our rapid overall growth may make less apparent any adverse effects of this trend on our near-term financial performance. We expect mobile GMV as a percentage of total GMV will grow and that our monetization rates for mobile interfaces in the near term will be lower than those we have achieved from websites because to date our focus has not been on maximizing mobile monetization and we have only recently begun to increasingly monetize mobile activity. Going forward we believe our financial results will become increasingly dependent on our ability to monetize the use of mobile devices to access our marketplaces. We expect this trend will have a greater effect on our business to the extent that shopping on mobile devices displaces transactions that could have occurred on personal computers.


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