Well, that trade didn't work out as expected for Greenlight Capital.
David Einhorn's dive into Yahoo!
In a letter to investors that was acquired by Reuters on Friday, Einhorn points to the nasty Alipay fiasco for his popular hedge fund's early exit.
Einhorn's original bullish thesis in April was that Yahoo! was being valued for less than the sum of its parts. He saw Yahoo!'s overseas interests -- essentially its stake in Yahoo! Japan and China's Alibaba Group -- worth roughly $8 a share. It would seem to reason that Yahoo!'s flagship website portal, cash, and its huge display advertising stronghold would be worth more than the single-digit balance.
The theory began to come undone in May, when Yahoo! revealed that Alibaba had quietly transferred Alipay -- a financial transaction platform with more users than eBay's
"This wasn't what we signed up for," Einhorn wrote last week. "We exited with a modest loss."
Einhorn's a brilliant investor, so should shareholders follow suit?
I don't think so.
Optimism springs eternal
I'm not Yahoo!'s biggest fan, but I do believe that Alibaba will ultimately do the right thing here. It's not a coincidence that China's dot-com darlings began to crater after news of the Alipay swindle went public. Social-networking leader Renren
Investors began to dump shares of Chinese stocks, and rightfully so. What were stateside investors buying if even the mighty Yahoo! and Japan's SoftBank could be taken for a ride in the world's most populous nation? Buying into China's growth story was a strong leap of faith into wild waves, and Alibaba was draining some of the water.
The pressure is on Alibaba to compensate Yahoo! and SoftBank, and Chinese companies have more at stake here than just stateside traders. The health of China's equity market to outside investors rests largely on Alibaba doing right by its minority stakeholders. If anything, this may be just the catalyst to give Yahoo! the opportunity to cash out of its valuable Asian holdings. If Alibaba can find a way to buy out Yahoo! and SoftBank at a reasonable market premium, everybody wins.
What remains
This brings us to Yahoo!'s business. Yahoo! will never grow its revenue as quickly as market leader Google
Analysts see Yahoo!'s profitability growing 17% next year to $0.91 a share, even though the top-line forecast checks in a mere 6% spurt.
Don't make the mistake of dividing the company's current share price by next year's profit target to arrive at an earnings multiple in the high teens. Remember that roughly half of Yahoo!'s share price is spoken for by its overseas investments and healthy cash balance.
There isn't a lot of excitement in Yahoo! these days. It's been nearly three years since the stock traded higher than the teens. Einhorn isn't the first smart investor to buy in, banking on the value of Yahoo!'s Asian investments or buyout prospects. He won't be the last. However, it's also this kind of rust that often triggers a shareholder-pleasing revolt at the top -- or at the very least a desperate CEO willing to explore the sale of valuable investments or win shareholder approval through price-popping initiatives. Einhorn's quick towel-tossing ways will place even more pressure on Carol Bartz to unlock shareholder value.
Yahoo! can't trade in the teens forever, and that's something that even Justin Bieber knows all too well.
Will Yahoo! break above or below the teens when it does begin to move? Share your thoughts in the comment box below.
