What The Alibaba Group Holding Ltd (BABA) Spin-Off Means For Yahoo! Inc. (YHOO) Stock

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October 20, 2015 12:36pm ETF BASIC NEWS

alibabayahooKyle Anderson:  Yahoo! Inc. (NASDAQ:YHOO) stock has climbed 16% in October. Now investors are awaiting the Q3 earnings report on Tuesday, Oct. 20, as a lackluster report could put an end to that run.

Yahoo stock

Investors will focus on earnings per share and revenue, but the most important part of the Yahoo Inc. (Nasdaq: YHOO) earnings report will be an update on the Alibaba stock spin-off.

On Sept. 29, Yahoo officials announced that they will be moving forward with spinning off the company’s 384 million shares of Alibaba Group Holding Ltd (NYSE:BABA). Yahoo has previously said it plans to spin off those shares through a tax-free deal during Q4.

Wall Street pundits had some questions about the eligibility of the deal’s tax-free status. In an ambiguous letter, the IRS wrote in September that it would issue neither a favorable nor an unfavorable ruling on the deal’s tax-free status.

Still, Yahoo’s board believes the deal should move forward without any issue from the IRS.

You can see how important the Alibaba stake is to Yahoo when you compare it to Yahoo’s total market cap of $31.5 billion. At today’s opening price of $71.80, those Alibaba shares are worth more than $27.5 billion.

That means much of Yahoo’s business is based entirely on its stake in Alibaba.

MKM Partners’ Rob Sanderson detailed this in a letter to investors last month:

“We think Yahoo’s core business should support a valuation of 4 times earnings before interest, taxes, depreciation and amortization (Ebitda), which implies $4 per share on our current estimates (relatively in-line with consensus).”

According to Sanderson’s letter, Yahoo and CEO Marissa Mayer will switch their focus to the company’s mobile presence, native advertising revenue, search business, and other core businesses once the spin-off is complete.

But readjusting the company’s focus is just one reason Yahoo stock investors want the company to move forward with the Alibaba spin-off…

What the Alibaba Spin-Off Means for Yahoo Stock

More than anything, those invested in Yahoo stock have been waiting months to have cash returned to them from the Alibaba spin-off.

When the spin-off was first announced, company officials said the proceeds would be used for a major stock buyback program.

While shareholders will receive billions from the spin-off, they’re hoping the deal takes place sooner rather than later. Over the last year, shareholders have watched the value of that Alibaba stake decline steadily.

Alibaba stock reached a high of $120 per share in November 2014. At that price, Yahoo’s stake in Alibaba was worth a whopping $46 billion.

Since then, Alibaba stock has fallen more than 40%. That has cut the value of the spin-off by nearly $20 billion. That’s quite a bit of cash that Yahoo shareholders have watched disappear.

Yahoo stock has almost been in lock-step with Alibaba stock during that decline. Since last November, Yahoo stock has fallen more than 31%.

With the Chinese economy reporting slowing growth every quarter, U.S. investors continue to worry about Alibaba stock. Those who are invested in Yahoo stock want the Alibaba spin-off to take place as soon as possible, as many believe BABA will continue to fall.

Since the deal could mean more than $27 billion in cash for Yahoo shareholders, any update on the deal during this week’s earnings report will have a major impact on the Yahoo stock price.

The Bottom Line: Yahoo stock is up 16% in October, and investors are hoping the run will continue after tomorrow’s earnings report. While some will be watching for EPS and earnings beats, the biggest thing to watch for is an update on the Alibaba spin-off. The deal will return more than $27 billion to the company and its shareholders and is the main reason the stock is up this month.

Money MorningBrought To You Courtesy of Kyle Anderson

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