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What Does Alibaba Have In Store For Yahoo's Investors?

August 08, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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While most of the digital advertisers have had a merry time on the exchange because of the uptick in earnings, Yahoo (YHOO) has been left out of the party because of its unpleasing results. In fact, one of the articles from Business Insider put up this title: “AOL reports another strong quarter, makes Marissa Mayer and Yahoo look even worse.” Yahoo’s revenue has dropped since the last year especially the search revenue which is its core segment. In the second quarter of fiscal 2014, Yahoo’s earnings dipped approximately 15% which led to visible investor disappointment.

Apart from everything else, the dynamic CEO of Yahoo, Marissa Mayer, was quite displeased due to a considerable fall of around 8% in display revenue, the focus of Mayer’s turnaround strategy for Yahoo. However, the CFO of the company remained positive and noted progress in Yahoo’s overall financial condition over the last couple of years. He remarked that the company is now seeing stabilized revenues and is well positioned to work on building its display ads portfolio in order to leverage future opportunities.

Will Alibaba mantra work?

Touted as one of the largest technology IPOs to list in the US market, Alibaba’s IPO size is being pegged anywhere between $15 billion to $20 billion. Before we go on to discuss the potential implications of Yahoo’s stake sale in Alibaba, let me give you a brief on the reasons that are pushing up Alibaba’s valuation. It is interesting to note that, when Alibaba officials filed their IPO prospectus in May, the company reported having $5.66 billion in revenue and $2.85 billion in net income in the nine months ended December 31. Additionally, the company also reported that its network of sites handle approximately 80% of all retail online sales in world’s second largest economy i.e China.

To give more numbers in order to understand the magnanimous valuation of Alibaba, the internet corporation handled more than 1.5 trillion Yuan – about $248 billion – of transactions for 231 million active users across its three main Chinese online marketplaces in 2013, more than Amazon and eBay Inc combined. It did so with 20,884 full-time workers, fewer than eBay. "If it's able to transport that kind of power to outside China, it has the potential to become a true global e-commerce powerhouse," said Roger Entner, lead analyst and founder of Recon Analytics.

In a nutshell, the point I am trying to drive home is that Alibaba has been an exceptional performer in China and because of such bullish figures the valuation of the company has even gone beyond $200 billion. Now, because of its colossal scale, Alibaba’s IPO has become the big news on the Street especially for the investors of Yahoo as the latter currently owns approximately 40% stake in the company which was bought way back in 2005. As per media reports, this stake sale will bring around $10 billion to Yahoo’s kitty, and this will definitely have some long-ranging impact on its business as well as investors.

Going by the words of Yahoo’s current CFO Ken Goldman, the company is committed to return at least half of the after-tax IPO proceeds to shareholders, in line with their overarching commitment to maximizing shareholder value through prudent capital allocation. Since Yahoo does not have any dividend history, it is safe to assume that the said capital will be refunded to the shareholders via a buyback and thus, investors could get a considerable capital appreciation on their investment.

Takeaway

As is evident, Yahoo has not been an outstanding performer in the recent times but the company has been attempting hard to evolve into an integrated media and entertainment company. It has made several acquisitions over the last years and also made some significant appointments in order to expand its business operations. Quite recently, the media giant hired the famous Katie Couric for $6 million per year to be its “global anchor,” thereby signalling the revamp it intends in its content business.

In my opinion, it will be prudent to hold on to Yahoo as it attempts to strengthen its display ads business. Also, the proceeds from Alibaba will provide big impetus to the company and investors should watch out for its capital allocation strategy.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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