Is there more to Yahoo than Alibaba?
It’s being called the IPO of the century – perhaps the IPO of all time – Alibaba Group Holding Ltd (BABA, Financial) officially began trading on September 19. This Chinese technology giant has steamrolled the competition and stands head and shoulders above most of its competitors, including eBay (EBAY, Financial) and Amazon (AMZN, Financial). Interestingly enough, ailing U.S. Internet search engine giant Yahoo (YHOO, Financial) owns a 22.6% stake in Alibaba. Many analysts believe that Yahoo’s profitability is largely tied to its stake in Alibaba.
Headed by CEO and founder Jack Ma, Alibaba is a juggernaut in the e-Commerce world. Yahoo is expecting to raise approximately $7.6 billion from the sale of its 140 million Alibaba shares. Alibaba stock is expected to start trading between $60 and $66 when the IPO goes public. And based on analysts’ projections, the stock could spike considerably in the short term. While Yahoo will likely generate windfall profits from the sale of a portion of its stock in Alibaba, it is expected to continue holding a 16% stake in the e-Commerce giant.
What will Yahoo do with the money?
Yahoo has had a tough time of late, making acquisitions that have proven less than fruitful for the company’s strategic growth plans. On the plus side, Yahoo still ranks right up there in terms of unique visitors, with figures of 165.1 million in July. Google (GOOG, Financial) trumped Yahoo in July with 191 million unique visitors. In terms of overall activity on search engines, Yahoo accounted for 10% of all search engine activity with Microsoft accounting for 19% and Google the remaining 67%.
It is clear that Yahoo has lost considerable ground to Google and Microsoft, and this trend looks likely to continue in the search engine arena. What this means for Yahoo stock holders is a shrinking revenue stream from advertisements and less Internet clout for Yahoo. As the core of its operations, Yahoo will have to make transformational changes to its search engine or continue to snap up viable media companies to build a thriving enterprise. As it stands, Yahoo cannot afford to rely on its Internet search engine for its long term profitability.
This begs the question: what will Yahoo do with its Alibaba windfall? There are many suggestions being floated about what Yahoo should invest in. Banc De Binary experts have suggested that the best course of action would be a multi-pronged investment strategy that would include social media acquisitions, mobile technology and the financing of unique online material. With so much uncertainty about Yahoo’s long-term prospects, some experts are of the opinion that Yahoo’s success is largely dependent on its interest in Alibaba which is a raging e-Commerce success story.
Yahoo has been wracked by costly failures over the years. Several expensive acquisitions – GeoCities among them –Â lost the company a fortune. Other acquisitions that stockholders are anxiously watching include the $1.1 billion paid for social media site Tumblr, the analytics firm Flurry and a mobile app named Blink. Of course it’s entirely possible that Yahoo is sitting on a gold mine in the form of Alibaba. If in fact this proves to be the case, then Yahoo will be able to hold its head up high knowing that Jerry Yang got something right when he insisted on paying $1 billion for a big chunk of Alibaba. That was 9 years ago, and this investment looks likely to pay off in a big way.
Here’s an interesting fact about Yahoo: its market cap of $39 billion is largely made up of its shares in Alibaba. In fact, just $8 billion of that figure makes up Yahoo’s core activities. And it makes perfect sense, too, since Alibaba has captured a full 80% of the Chinese e-Commerce market. Alibaba was lured by all of the world’s stock markets and bourses, with the NYSE finally winning out. Alibaba is expected to raise anywhere between $20 billion and $25 billion. When Yahoo sells a percentage of its holdings in Alibaba, it may well return as much as half of its post-tax proceeds to shareholders. The specific way this will be achieved could range between dividends and stock purchases. The balance of the funds will be used to invest in other companies.
Should you Invest in Yahoo or Alibaba?
There remain many questions about precisely what Yahoo can get its hands on that Facebook, Google or other tech giants like Alibaba can’t. Regardless of what Yahoo decides to do with its windfall cash earnings, investors are still faced with the question of what to do with their disposable income: invest in Yahoo or invest in Alibaba directly? Several leading stock management experts believe that Alibaba has greater returns potential since it is the actual cash cow that Yahoo has an interest in. When you pump money into Alibaba, you’re getting maximum bang for your buck. By contrast, when you invest in Yahoo, you’re only getting a portion of your investment returns from Alibaba – the rest is coming from Yahoo’s core businesses which are not performing so well.
With all things considered, Alibaba has invested over $5 billion since the start of 2014, with acquisitions like AutoNavi Holdings Ltd and UCWeb. In total, the number of consolidated entities increased from 202 to 279 between March and June. The price of Yahoo stocks is also increasing but at a far more modest pace. The general consensus is that Alibaba will enjoy far greater gains than Yahoo, but Yahoo is certainly on the Alibaba bandwagon. Another company that can be considered a worthwhile investment in the runup to the Alibaba stock offering is SoftBank (SFTBY, Financial) which has a 36% ownership of Alibaba. But both Yahoo and SoftBank have been on a downhill slide for most of 2014. Ultimately, it’s a personal decision about where to invest but if it’s Alibaba that you’re interested in the direct approach is probably best.
