March 02, 2011 - 1:29am EST by
2011 2012
Price: 16.10 EPS $0.00 $0.00
Shares Out. (in M): 1,309 P/E 0.0x 0.0x
Market Cap (in $M): 21,082 P/FCF 0.0x 0.0x
Net Debt (in $M): -3,629 EBIT 0 0
TEV (in $M): 17,453 TEV/EBIT 0.0x 0.0x

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Everyone with an internet connection knows what Yahoo is, so I won't bother with a business description. Anyone who's read the business press also knows that they are getting their lunch eaten by Google and Facebook. So why is this a long?
1) this company and stock has underperformed and thus sentiment is terrible
2) they own some underappreciated assets in Asia
3) management is highly motivated to unlock the value of these assets
This is a sum-of-the parts story, so lets review what we have:
1) Core Yahoo business. This is a leading web portal, email provider and internet media property (#1 in US visitors in news, sports and entertainment). This business should do about $4.5bn of revenue this year (45% display, 33% search and the balance fees/other). I estimate this year's EBITDA ex-stock based comp (how "street" looks at it) at $1.8bn and EBITDA with stock-based comp at $1.6bn. Free cash flow should be around $0.9bn this year. Revenue will be down slightly this year due to a search deal they did with Microsoft and some businesses they exited. However, I think going forward revenues should grow modestly. Despite competitive pressures from Google and Facebook, I feel comfortable free cash flow will grow over the next couple years because 1) the company is executing on a turnaround plan to drive EBIT margins from ~17% in 2010 to a goal of over 30% in 2013 and 2) by 2013, capex should also fall by ~$100m from the current year's $550-600m guidance. I think I am being conservative in valuing this business a value at $9bn which equates to 5.6x EBITDA and 10x FCF.
2) Cash and equivalents of $3.6bn
3) Stake in Yahoo Japan (ticker 4689 JP on Tokyo exchange). Based on current trading price this is worth $7.9bn.
Lets stop for a second and add up what we have thus far: $9bn + $3.6bn + $7.9bn equals $20.5bn. These three parts are almost the entire market cap today of $21.1bn.
Many of people who have looked at this situation apply a large haircut to the value of the Yahoo Japan stake. However, there are press reports that YHOO is exploring a way to realize the value of this holding in a tax-efficient manner. I don't know exactly what structure this will take but it will likely involve an asset swap, tracking stock or spin-off. Lets assume that the company and bankers can find a tax-efficent way to monetize this value.
Now that we've covered these three assets, what else do you have left? You are paying $0.6bn for 40% of the leading eCommerce company in China, Alibaba Group.
Alibaba Group is comprised of 3 major assets:
1) - publicly listed (ticker 1688 HK on Hong Kong exchange)
2) Taobao - leading eCommerce platform in China with 75-80% share of all Chinese eCommerce. The best way to describe this to is that its a marketplace business similar to EBAY.
3) Alipay - leading online payments platform in China with approx 50% of all Chinese online payments.
Lets look at as this is the easist to value. On a "look-through" basis, YHOO's stake in is worth $2.8bn based on latest quoted price.
The other two assets are harder to value as they are private companies with almost no disclosure. However, since you're effectively being paid to own them I view them as nothing but upside. Having said that, I think there is a lot of upside so lets walk though some assumptions to see what Taobao and Alipay could be worth.
Taobao had GMV (gross merchandise value) of approx $55bn in 2010. To put this into context, this is similar to what EBAY's marketplace business did in GMV in 2010. Chinese eCommerce is growing very rapidly (expected to roughly triple from 2010 to 2013 according to various sell-side estimates). Taobao's current 75-80% share of eCommerce in China will likely decline so lets assume that GMV doubles over the next 2-3 years to $110bn
Currently EBAY generates revenues equal to 7-8% of GMV (revenues/GMV = "take-rate") but Taobao is very lightly monetized (~1% take rate). Taobao is working on increasing its take rate so lets assume they can get this up to 3% over the next 2-3 years (still a massive discount to EBAY). I think one of the ways they will get the monetization rate up is through Alipay, which is the online payments system which they own. They charge next to nothing for this service today and can move up monetization rates over time.
Assuming $110bn of GMV and a 3% take rate, Taobao and Alipay could generate $3.3bn of revenue in 2-3 years. Since this is an "asset-light" marketplace network, EBIT margins are likely pretty high at scale so lets assume 30%. This gets us to $1bn of EBIT and $850m of net income (assume no interest expense/income and 15% tax rate, which is typical for Chinese tech companies). If you put a 25x PE on this business is worth $21bn. I know most members on this site balk at PEs above 15x, but take a look valuations for leading Chinese internet companies (BIDU, DANG, YOKU) and this will look conservative. As another check, note that the leading search company in China BIDU has a current market cap of $44bn. Couldn't a company that currently has 75-80% share of all eCommerce in China be worth 1/2 that value?
If Taobao and Alipay are worth $21bn, YHOO owns 40% so their stake is worth $8.5bn.
Adding together $2.8bn for and $8.5bn for Taobao+Alipay gets a potential value of $11.3bn for the 40% stake in Alibaba Group in a couple years.
To sum it all up, YHOO's market cap is currently $21.1bn. Of if you add the core business + cash + Yahoo Japan stake + Alibaba Group stake together you could have value of $31.8bn in a couple years. On 1.3bn shares outstanding, this is over $24/share. Even if you tax the Alibaba Group value at 40% you get to $21/share of value.
On the downside, I think given the amount of asset value the stock has good support at $14-15/share. Its worth noting that the company also sees value in its own shares and was actively buying stock last year - they spent $1.7bn buying back 119m shares at an average price of $14.70. Thus, even if Alibaba Group isn't worth as much as I think it is, I don't think you'll lose much money buying the stock here.

Therefore, I think this is a very compelling risk/reward opportunity with $1-2/share of downside and $5-8/share of upside over the next couple years.


Sum-of-the parts stories need a strong catalyst or else they are value traps. In this case, the catalyst will be management working to unlock the value of their holdings. It seems like they are well on this path based on the recent press reports of them trying to monetize the Yahoo Japan stake in a tax-efficient manner.
I am a big believer in management incentives and senior management at YHOO is highly motivated to get the stock price higher. CEO Carol Bartz has one of the most geared stock options packages I have ever seen. 2/3 of her options don't even vest until the stock reaches certain thresholds between $20.53 to $35.19. Thus, you have to believe that she'll do anything she can to highlight the value of these assets to investors.
See the following filing for more details:
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