Yahoo! Inc. (YHOO): Three Major Concerns for This Company

3. Lower Earnings from Equity Investments

Yahoo! Inc. (NASDAQ:YHOO)’s bottom line years in recent years have been increasingly driven by earnings and dividends from its equity holdings, mainly from Alibaba and Yahoo Japan. Yahoo recently sold a sizable portion of its stake in Alibaba for a cool $7.1 Billion but still retains 24% of the Chinese e-Commerce giant.

However, Alibaba can buyback from Yahoo another ~8% or 261.5 million shares before the highly anticipated IPO of Alibaba. The rising e-Commerce company’s management buying back a huge amount of stock before an IPO at a reasonably high valuation by taking on debt portrays only one thing; the management of Alibaba believes the intrinsic value of the business is much greater.

With another potential and highly likely buyback from Alibaba before an IPO on the cards, Yahoo’s bottom line might get hurt even more, but its balance sheet will love it. Yahoo should try and hold onto its stakes for as long as possible, as Alibaba is already one of the strongest technology companies in the world and will gain more prominence down the road. A reduced stake in Alibaba translates into a noticeably smaller net income for Yahoo.

The Takeaway

Yahoo! Inc. (NASDAQ:YHOO)’s top line revenues haven’t grown in the last 5 years, in fact, they have gone down from $7.2 Billion in 2008 to roughly $ 5.0 Billion. The major positives in recent years have been the increased valuation of its lucrative stakes in Alibaba and Yahoo Japan.

The new management team has taken a few steps like building out a newer homepage, and changes to its email platform, but those alone, might not be enough to engineer a turnaround for the company’s core businesses in the long run. For starters, Yahoo! Inc. (NASDAQ:YHOO) should form an amicable relationship with Alibaba and hold on to its crown-jewel and also be best friends with Microsoft.

The article Three Major Concerns for This Company originally appeared on Fool.com and is written by Ishfaque Faruk.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.