Yahoo! Inc. (NASDAQ:YHOO) shares have risen following moves by new management to restore growth. In a previous article, I had discussed the changes at Yahoo! with a particular focus on its renewed push into mobile. There is still more upside to the shares with most of the company’s value actually coming from its ownership interests in Yahoo! Japan and the Alibaba Group. Based on a sum of the parts analysis, investors are valuing Yahoo! Inc. (NASDAQ:YHOO)’s core business at just $4.00-$4.50 per share.
Alibaba Group accounts for $9.50 – $11.50 of Yahoo!’s value per share
Yahoo! has a 24% ownership interest in Alibaba Group currently. Half of its interest was converted last year to cash and preferred notes. Yahoo! Inc. (NASDAQ:YHOO) has $831 million in Alibaba preferred notes.
Alibaba Group has internet-based businesses that focus on making it simple for small businesses to buy and sell online from anywhere in the world. It has developed consumer e-commerce, online payment, and business to business markets. It reaches users in 240 counties. Alibaba.com, one of its 25 business units, is the global e-commerce platform. It facilitates cross border trade to help small businesses become global. At the end of 2012, it had 36.7 million users with 2.8 million storefronts.
The China portion of the business is of high interest and accounts for a significant portion of Alibaba’s value in TaoBao and Tmall. Consumers in China rapidly adopted online shopping versus bricks and mortar. Alibaba’s operations benefit from the ongoing shift to buying online, the increasing purchasing power of the consumer, and the size of the Chinese market. Alibaba.com China has 77.7 million users and 8.5 million storefronts. It also has the Taobao Marketplace, the most popular consumer-to-consumer Chinese marketplace, with 800 million listings and 500 million users. It is one of the world’s 20 most visited websites.
Alibaba Group reported an increase in revenue of 80% in 4Q12 to $1.84 billion y/y. Operating income rose 172% y/y to $753 million and a margin of 41%. The results were better than expected by analysts and have driven the shares of Yahoo! higher. Following the results, some pushed their valuation of Alibaba up by 25%.
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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