Yahoo! (YHOO, Financial) is a company shrouded in questions recently, especially by value investors, many of whom believe the stock is undervalued. Last week, value investor David Einhorn decided that the company’s financial results and uncertain earnings growth potential were more than made up for by the value of its $2.5 billion ownership interests in China, and purchased a large stake. This week, Yahoo! Inc. faced a disruption in those China-based holdings that caused its stock to dive over 7%. Einhorn’s fund, Greenlight Capital, established a new position in Yahoo in the first quarter at $16.93 per share. He noted several reasons for the decision, but said that Yahoo’s 40% stake in Chinese search engine Alibaba Group’s still-private holdings “which are separate and distinct from its ownership in the publicly-traded Alibaba.com” were its “most valuable asset.”
Among the Chinese companies he referred to are Taobao, China’s leading eCommerce website which sold more merchandise than eBay last year, and Alipay, an online payment provider.
Controversy arose this week when it came to light that Alibaba had sold Alipay to another company owned by Alibaba's CEO Jack Ma, and Yahoo and Alibaba disagreed about the details and sequence of the events. Yahoo said it did not hear of the transaction, which took place in 2010, until March 31, 2011, but Alibaba issued a press release saying Yahoo had known for years about the inevitability of the sale due to impending Chinese regulations.
Many analysts believe that the worst fallout from the deal is a potential increased shareowner distrust about the security of the relationship of between Yahoo and the Chinese company that represents an estimated one-half of its value.
But others question how much value they will lose without Alipay. In March, Alibaba Group reported its 2010 financials, which showed robust growth. Alibaba’s revenue grew 43% since 2009. TaoBao and Alipay combined had revenue growth of 177% since 2009. On March 22, just before the news about Alipay broke, Benchmark analysts valued TaoBao and Alipay at an estimated $10 billion, and the value of all of Yahoo’s Chinese assets to be worth $8 of Yahoo’s share price. Alibaba was paid $46 million for Alipay.
David Einhorn wrote in his investor letter that Yahoo’s core business and publicly traded securities and cash alone are worth $18 per share, and that he was getting the still-private holdings in China “essentially for free.”
In a statement yesterday, Yahoo said, “Yahoo continues to work closely with Alibaba and Softbank to protect economic value for all interested parties. We believe ongoing negotiations among all of the parties provide the best opportunity to achieve an outcome in the best interest of all stakeholders.”
Einhorn’s letter noted several other selling points about Yahoo. He said that the company had become more friendly toward shareholders, taking steps such as giving up competing with Google (GOOG, Financial) in the web search business to reinvest the money elsewhere, such as in buying back outstanding shares. Search engine traffic has fallen significantly over the last year, but this month Yahoo’s gained two-tenths of a point in search engine market share, rising to 15.9%. Google’s share of the search market fell three-tenths of a percentage point to 65.4%.
Yahoo also still has its 35% stake in Yahoo! Japan worth far more than its Chinese assets at $7.3 billion, and $3.5 billion in cash. According to Yahoo’s 10-Q for the period ending March 31, 2011, net income increased to $312.3 million from $224.8 million in the fourth quarter 2010. Excluding traffic acquisition costs and revenue share related to a search agreement with Microsoft, the company’s quarterly revenue was flat year over year.
Eight other gurus own Yahoo! stock. So far in the first quarter of 2011, Whitney Tilson has reported adding to his stake in Yahoo!.
Among the Chinese companies he referred to are Taobao, China’s leading eCommerce website which sold more merchandise than eBay last year, and Alipay, an online payment provider.
Controversy arose this week when it came to light that Alibaba had sold Alipay to another company owned by Alibaba's CEO Jack Ma, and Yahoo and Alibaba disagreed about the details and sequence of the events. Yahoo said it did not hear of the transaction, which took place in 2010, until March 31, 2011, but Alibaba issued a press release saying Yahoo had known for years about the inevitability of the sale due to impending Chinese regulations.
Many analysts believe that the worst fallout from the deal is a potential increased shareowner distrust about the security of the relationship of between Yahoo and the Chinese company that represents an estimated one-half of its value.
But others question how much value they will lose without Alipay. In March, Alibaba Group reported its 2010 financials, which showed robust growth. Alibaba’s revenue grew 43% since 2009. TaoBao and Alipay combined had revenue growth of 177% since 2009. On March 22, just before the news about Alipay broke, Benchmark analysts valued TaoBao and Alipay at an estimated $10 billion, and the value of all of Yahoo’s Chinese assets to be worth $8 of Yahoo’s share price. Alibaba was paid $46 million for Alipay.
David Einhorn wrote in his investor letter that Yahoo’s core business and publicly traded securities and cash alone are worth $18 per share, and that he was getting the still-private holdings in China “essentially for free.”
In a statement yesterday, Yahoo said, “Yahoo continues to work closely with Alibaba and Softbank to protect economic value for all interested parties. We believe ongoing negotiations among all of the parties provide the best opportunity to achieve an outcome in the best interest of all stakeholders.”
Einhorn’s letter noted several other selling points about Yahoo. He said that the company had become more friendly toward shareholders, taking steps such as giving up competing with Google (GOOG, Financial) in the web search business to reinvest the money elsewhere, such as in buying back outstanding shares. Search engine traffic has fallen significantly over the last year, but this month Yahoo’s gained two-tenths of a point in search engine market share, rising to 15.9%. Google’s share of the search market fell three-tenths of a percentage point to 65.4%.
Yahoo also still has its 35% stake in Yahoo! Japan worth far more than its Chinese assets at $7.3 billion, and $3.5 billion in cash. According to Yahoo’s 10-Q for the period ending March 31, 2011, net income increased to $312.3 million from $224.8 million in the fourth quarter 2010. Excluding traffic acquisition costs and revenue share related to a search agreement with Microsoft, the company’s quarterly revenue was flat year over year.
Eight other gurus own Yahoo! stock. So far in the first quarter of 2011, Whitney Tilson has reported adding to his stake in Yahoo!.
