Loeb’s new investment in a company many believed was fading into Internet history has proved profitable to date. Over the last three months Yahoo’s stock price has advanced 44% and trades for around $16 a share on Tuesday. But Loeb hopes to make his investment even more profitable.
Directly after acquiring his 5.15% activist stake in Yahoo, Loeb issued a letter demanding “sweeping changes” to the board and company leadership, and outlined “the hidden value of Yahoo, which has been severely damaged – but not irreparably – by poor management and governance.”
Loeb named the company’s biggest mistakes as hiring Carol Bartz as CEO, turning down Microsoft’s $31 per share bid in 2008, a bungled search deal with yahoo, the Alipay misadventure, among others.
He also said that he believes Yahoo is grossly undervalued and that it’s Asian assets are particularly valuable.
Focusing specifically on the Alibaba Group, the mid-term value potential for this stake alone could represent another $5.00 per share of upside. The e-commerce interests housed under the Alibaba Group umbrella hold the dominant positions in the “B2B” (63% of 2010 market share according to Marbridge Consulting), “C2C” (85% share) and “B2C” (51% share) Chinese e-commerce markets. Alibaba Group’s Taobao business is essentially Ebay and Amazon on steroids in terms of market share and revenue growth. According to Goldman Sachs, the Chinese e-commerce market was $75 billion in 2010, with a 3 year forward compound annual growth rate of 43% compared to the $193 billion U.S. market with compound annual growth of 14% over the same period. We currently estimate a pre-tax value for Alibaba Group of $25 billion. Given Alibaba Group’s growth potential and market share, it is entirely conceivable that Yahoo’s 40% fully diluted stake in Alibaba Group could double in value over the next 2-3 years, highlighting its tremendous value.
On November 4, Loeb penned another letter calling for the dismissal Jerry Yang from Yahoo’s board for neglecting the interests of shareholders and demanded Third Pointe be awarded two board seats to work on a long-term strategy for the company.
Yahoo released its third quarter financial results on October 18. Its revenue, excluding traffic acquisitions costs, decreased 5% year over year. Income from operations decreased 6% year over year. The company attributed the decreases primarily to revenue share related to a search agreement with Microsoft (MSFT). Cash flow generated was $247 million, a 1% year over year decrease.
Another element that might have caught Loeb’s eye is Yahoo’s significantly low P/S ratio: