Yahoo! Inc. (YHOO), And Another Tech Giant’s IPO..Should You Buy?

Yahoo! is valuable with its Alibaba’s stake

For Yahoo!, what makes me excited about this company is not the operation itself, but its stake in the giant Chinese e-commerce company, Alibaba. Yahoo! still owns around 20% stake of Alibaba on a diluted basis, after selling back half of its 40% to Alibaba. According to Dealbook, Alibaba is different from Amazon.com, Inc. (NASDAQ:AMZN), as it doesn’t have any inventory. Its business model is also different from eBay Inc (NASDAQ:EBAY), as the majority of its revenue comes not from advertising, but from users. If Alibaba could have the same 30% operating margin level that it had in September 2012, and the tax rate stayed at around 15%, its 2014 earnings would be around $3.8 billion.

As the biggest Chinese gaming network, Tencent, is valued at around 25 times its forward earnings, the same valuation level would value Alibaba at around $95 billion. Thus, Yahoo!’s 20% stake in Alibaba would be worth as much as $19 billion. Yahoo! is currently trading at $24 per share, with a total market cap of more than $27 billion. If Alibaba is valued as much as $95 billion, Yahoo!’s business alone would be worth only $8 billion on the market.

Foolish take

Investors should keep their eyes on Alibaba’s potentially large IPO, a fast growing Chinese e-commerce giant. That would largely determine whether or not Yahoo! is cheap or expensive. At $95 billion market valuation, Yahoo! seems to be cheap at its current trading price. Indeed, Yahoo! could be considered an opportunistic stock on Alibaba’s IPO.

The article Yahoo! Is An Opportunistic Play On Alibaba’s IPO originally appeared on Fool.com and is written by Anh HOANG.

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