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Yahoo!'s (Nasdaq: YHOO ) fourth-quarter report wasn't bad, but it also wasn't particularly encouraging for those hoping Carol Bartz would be able to magically invigorate the struggling tech company. Bartz arrived at Yahoo! two years ago with much fanfare, and so far has little to show in terms of compelling growth. Bartz has relied on cost cutting to boost profits and has seen some success, as the quarter's operating margins doubled from the year-ago period, but turning around Yahoo!'s core business will require more growth and less cutting.
The quarter was fine
Yahoo! is still the leader in display advertising, a business that saw a 16% revenue increase in the fourth quarter. Sure, much of the advertising gains are offset by Yahoo!'s continuous loss of search market share to Google (Nasdaq: GOOG ) and even Bing, but Bing's transition into Microsoft's (Nasdaq: MSFT ) more capable hands should stabilize this business and allow Yahoo! to focus on its stronger assets. In addition, Yahoo! continues to dominate Web content in sports and finance. Yahoo! Finance has been the leader in this category for 36 straight months, and has 44% of the total market audience. Yahoo! Sports is still the most-visited sports site on the Web, attracting more than 30 million unique viewers monthly, mainly from the coveted 25-49 male demographic.
The real value
So the quarter was fine, and Yahoo! still has some valuable businesses that Bartz can do her best cheerleading for, but I don't really care, and I don't think investors in the company should either. Sure, buying shares of Yahoo! gives you a piece of this once-lauded company, but more importantly it's the only way to get in on the leading e-commerce company in the largest and fastest-growing Internet market in the world: China.
Yahoo! owns about 40% of Alibaba.com, which includes e-commerce businesses such as Taobao and Alipay, China's equivalent to eBay (Nasdaq: EBAY ) and Paypal. Taobao is the 13th-most popular website in the world and third in China, and it commands 87% of the Chinese e-commerce market.
For valuation purposes, it helps to compare Taobao to NYSE traded E-Commerce China Dangdang (NYSE: DANG ) , a site similar to Amazon.com (Nasdaq: AMZN ) that is ranked the 451st most-popular site in the world and 78th in China. Dangdang only became profitable in 2009, raking in $2.5 million, a total that Taobao earned just through product listing and advertising fees. And for Taobao it is a profit that receives a much higher margin multiple as a result. One more piece of food for thought: Through October 2010, Taobao had more than 50 million unique visitors compared to Dangdang's 1.6 million unique visitors through September.
Dangdang's market capitalization of about $2.3 billion values the company at more than 300 times EBITDA, which shows you the potential value a Taobao IPO could unlock. I believe most analysts are underestimating the true value of Yahoo!'s Asian assets. Aside from its Alibaba investment, Yahoo! also owns 34.4% of Yahoo! Japan. Most analysts estimate the total value of Yahoo!'s Asian assets at about $12 billion, but with Yahoo! Japan believed to be worth about $7 billion, I believe its Alibaba assets are considerably undervalued.
Value in China's growth
If we use what I believe is a low-ball estimate of $12 billion for Yahoo!'s Asian assets and combine that with its $3.6 billion in cash, that means the rest of Yahoo!'s businesses and assets are valued at less than $5 billion. Even at this valuation, I am very content to wait it out, as the downside seems very limited, while the upside potential of its Asian assets is immense.
Investors should not look at Yahoo! as a turnaround story, but instead as a China story. Yahoo!'s most recent quarter showed it is doing just enough to maintain its business and stabilize its share price through its own operations. Though growth continues to be anemic, I believe Yahoo!'s strong core businesses and brand name alone should allow investors to feel very comfortable holding shares of Yahoo! at a less than $5 billion valuation. There is no doubt that Yahoo!'s Asian assets hold tremendous value that will only grow more valuable as the Chinese economy and e-commerce market continue their rapid expansion. It appears for now that the waiting is the hardest part.