In what appears to be another shrewd overseas investment, The Wall Street Journal reports, Yahoo! (Nasdaq: YHOO ) is looking to buy $100 million worth of Alibaba.com stock in the Chinese trading site's upcoming IPO.
Keep in mind that Yahoo! already owns a piece of the popular e-commerce site that hooks up businesses looking to import and export goods in and out of China. Yahoo! paid $1 billion for a 40% stake in Alibaba.com's parent company, Alibaba Group, two years ago.
The market will tell the tale on how the new $100 million investment pans out, but the $1 billion investment in 2005 has appreciated considerably. According to the Alibaba.com term sheet, the site is looking to raise as much as $1 billion by selling a 17% stake to the public. So even if there isn't a pop at the open, Alibaba.com is valued at nearly $6 billion.
That's a lot more than the $2.5 billion that Alibaba Group was valued at when Yahoo! bought in two years ago. And Alibaba.com is just a subsidiary. Alibaba watches over several properties including Yahoo! China and Taobao.
If you're not familiar with Taobao, it's the consumer-to-consumer auction site that has been giving eBay (Nasdaq: EBAY ) fits in China.
So it's easy to see why things can heat up for Yahoo! if the Alibaba.com IPO is a hit. A few healthy trading days can result in billions of unrealized gains for Yahoo! on paper. It would also be the catalyst to get investors to fully appreciate the company's diverse investments in hot Asian markets.
Investors often ignore the billions that Yahoo! has in play in Japan, China, and Korea. Even financial journalists can stray. Marketwatch ran a story yesterday, suggesting that Google (Nasdaq: GOOG ) is cheaper than Yahoo!. The crux of the argument is that Google trades at a little more than 30 times next year's bottom-line target, while Yahoo! is valued at a substantially higher multiple.
Value is relative, as in your third cousin
The problem with relying on P/E ratios to value Yahoo! is that a good chunk of Yahoo!'s market cap is backed by its investments in Yahoo! Japan, Alibaba Group, and Gmarket (Nasdaq: GMKT ) . Yahoo! Japan is the biggest component of that, but a well-received Alibaba IPO can create a meaty addition in the portfolio that has mostly been up to guesswork in the past. The assumptions and wishful thinking end once the stock begins trading in a few weeks.
How big a pop will we see for Alibaba.com? Baidu.com (Nasdaq: BIDU ) is China's most popular website. The search engine giant is valued at $11.2 billion. Could Alibaba double off its IPO price to lap Baidu? It can happen. Baidu's valuation may also creep higher in sympathy.
We can't rely on just Web traffic, of course. Search engines are lucrative, high-margin enterprises, but there's some serious money to be made in enabling business-to-business commerce, where Alibaba is a juggernaut. Just look at how well a company like LoopNet (Nasdaq: LOOP ) is doing closer to home, hooking up buyers and sellers in the surprisingly resilient commercial real estate market. (Brush up on LoopNet's past quarter.)
Ultimately, it will be Alibaba.com's financials and the market's appetite for its growth story that dictate its worth. It's doing just fine on the fiscal front. Reuters reports that Goldman Sachs is forecasting a profit of $83.8 million this year, a sharp 186% spurt from 2006. That's actually better than Baidu, where Wall Street is looking for Baidu to grow its bottom line by 105%, to roughly $77 million this year.
The growth story is just as tantalizing. Alibaba accounts for more than two-thirds of the B2B online action taking place in China, sourcing goods for a growing list of small and mid-sized businesses in the world's most populous nation.
So Yahoo! knows exactly what it's doing in buying 10% of the freshly minted shares at the IPO price. As long as the Chinese stock market doesn't take a tumble between now and then, it's holding all of the right lottery tickets.
Can't get in on the Alibaba.com IPO? Join the club. Looking for a back door? Hop on Yahoo! to ride the coattails of a coattail rider.
Things that Yahoo! did during its summer vacation: