I’m going to try and find a reasonable valuation because I suspect the market is not fairly valuing Yahoo stock. The reason is this: Some math results in Yahoo’s core business are literally worth less than nothing, and therefore the market may be giving us a value stock.
The Alibaba stake is worth $23 billion right about now. If true, then Yahoo at $31 per share is worth some $29.19 billion. Therefore, the market puts the core business value at $6.2 billion. However, the company has $6.79 billion in cash. When you back that number out, you get a valuation of less than zero.
This seems wrong, given that Yahoo generates $549 million in free cash flow. Yahoo may not be the dominant player as it was 20 years ago, but it still has brand and content value. It’s not a world leader, but it is worth something!
Consider Yahoo Japan
If I ended there, you’d think Yahoo stock might be worth a lot more than the market says it is. There is still more to consider, however. Yahoo Japan is worth some $6.9 billion. Now the valuation of Yahoo just seems insane. What’s going on? Can we slice this apart into pieces and make sense of it.
Let’s start at the basics.
Yahoo Japan is worth about $7 per share, and Yahoo has about $7 per share in cash. So it is worth $14 or so, right?
What is the core business really worth? It is difficult to peg, but if you look at other online businesses like IACInterActiveCorp (NASDAQ: IACI) and Liberty Media (NASDAQ: LMCA)’s online businesses, it is not unreasonably to value a $555 million FCF business at 10x FCF, or $5.5 billion, or about $5.50 per share.
What is Alibaba worth? As it stands, it is worth $29 per share or so. If we add that to our $14 in tangible worth, plus $5.50 in core business, we get we get $48.50.
Now we have to discount Alibaba. Why? Because the IRS is going to tax Yahoo’s share of it, and it may be taxed at a rate as high as 40%. That means about $12 per share gets taxed away. That brings Yahoo’s value down to $36.50. That’s getting closer to the truth, except there’s one more piece of discounting I have to do.
Alibaba is trading at 41x this past fiscal year’s earnings of $3.9 billion. I think that is a totally unreasonable valuation. Long term analyst projections show about 24% growth. I would cautiously value Alibaba at about 29x earnings, giving it a bit of a premium for its brand name. That’s a 30% discount from its present valuation, meaning Yahoo’s share worth about $21 billion or around $21 per share instead of $29. So knock off another eight bucks from valuation.
That lands us at about $28.50 per share. Now, I could be wrong. Maybe Yahoo’s core business is worth less, or maybe it is worth more. Maybe I’m wrong about Alibaba. Regardless, there is little margin for error here at $31.50. I would probably stay away form buying Yahoo stock at this point.
This article is brought to you courtesy of Lawrence Meyers from Wyatt Investment Research.