Yahoo! Inc. (YHOO) Is Undervalued Based on the Sum of Parts Analysis

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Baidu.com, Inc. (NASDAQ:BIDU) and Google Inc (NASDAQ:GOOG) both trade in the range of 20x – 30x TTM earnings. Baidu also has profit margins in the 40% range and is growing rapidly. In the last year, its revenue has went up 40%. Earnings for Baidu.com, Inc. (NASDAQ:BIDU) did not grow as fast as revenue though; only about an 8% gain. This 20x-30x TTM earnings range is typical for rapidly growing, higher margin businesses like Alibaba. Based on that range, the value to a shareholder of Yahoo! Inc. (NASDAQ:YHOO) is likely around $9.50 -$11.50 per share. This includes a discount for liquidity (it’s private) and taxes in the range of 35%-40%. See this table for a summary.

Value of Yahoo!’s other investments

Yahoo! Inc. (NASDAQ:YHOO) also has $831 million in preferred shares equal to $0.75 per share for shareholders. The 35% ownership interest in Yahoo! Japan (YOJ) is worth about $7 per share, and finally, the cash per share is worth $4.87 to Yahoo! shareholders. This table provides a summary of all its investments and cash value to shareholders.

The total value of the investments and cash is a little over $23.50 per share. At a current price of $27.21 per share, that means investors are paying just over $4.21 for shares of Yahoo!. Yahoo! Inc. (NASDAQ:YHOO) should generate over $1.5 billion EBITDA in 2014 within its core business. At a multiple of 5x – 6x EBITDA, this is equal to around $6.50 – $8.00 in per share value.

Conclusion

Based on the sum of the parts analysis, Yahoo! shares are relatively inexpensive at this point. The changes management has made, with a focus on finding growth, should only increase the value of the core business going forward. This, combined with the value of Alibaba Group, in particular, should continue to drive the stock higher.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu.com, Inc. (NASDAQ:BIDU).

The article This Company Is Undervalued Based on the Sum of Parts Analysis originally appeared on Fool.com.

Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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