Yahoo! Inc. (NASDAQ:YHOO) has recently taken off significantly after sluggish share performance in the past several years. Since the beginning of September 2012, Yahoo! Inc. (NASDAQ:YHOO) has climbed steadily, from $14.65 per share to more than $24 per share.
First quarter earnings results
Recently, Yahoo! Inc. (NASDAQ:YHOO) reported mixed first quarter earnings results. Revenue experienced a year-over-year decline of 7% to $1.14 billion. However, operating income rose by nearly 10% to $186 million, compared to only $169.4 million in the first quarter last year. The improvement in operating income was due to a significant drop in traffic acquisition costs, sales and marketing expenses, product development expenses, and restructuring reversals. In this quarter, Yahoo! Inc. (NASDAQ:YHOO)’s GAAP search revenue came in at $425 million, a 10% drop, compared to $470 million in the same period last year. Excluding traffic acquisition cost, its search revenue actually rose 6% to $409 million.
Google is still dominating in search
However, Yahoo! Inc. (NASDAQ:YHOO) search hasn’t been a significant threat to global search leader, Google Inc (NASDAQ:GOOG). According to comScore, Yahoo! ranked third, with only 11.8% of the global search market share, behind Microsoft Corporation (NASDAQ:MSFT) and Google in March 2013. Google is still the dominant player in this industry, accounting for a whopping 67.1% of the total market. Interestingly, compared to February 2013, both Microsoft Corporation (NASDAQ:MSFT)’s and Yahoo!’s market share has increased by 0.2%, while Google’s market share reduced by 0.4%. Google is famous for its search. However, it is not only a search company, but also a company with a lot of innovations. Its fresh new project is Google Glass, the wearable computer, which could capture five megapixel images and let users interact with the internet with voice commands. Google has set an initial price tag of $1,500, but this price was set for developers for an early test only.
Indeed, Google is set for a lot of potential innovation in the future. Shares are selling for around $801, with a total market cap of $264.8 billion. The market values Google at 15 times its forward earnings and 3.5 times its book value. Its PEG ratio is quite reasonable at 1.17.
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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