Yahoo! Inc. (YHOO), Alibaba Group Holding Ltd (BABA): Tracking The Two Stocks

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June 11, 2015 10:36am ETF BASIC NEWS

alibabayahooJim Bach: Since the September Alibaba IPO, the Yahoo stock price has moved almost in tandem with the Alibaba stock price.

That’s where Yahoo! Inc. (NASDAQ:YHOO) stock derives most, if not all, of its value.

Yahoo holds 383.5 million shares in Chinese e-commerce giant Alibaba Group Holding Ltd. (NYSE:BABA). Yahoo first took up a stake in Alibaba in 2005 at the urging of founder Jerry Yang. What was once a 40% stake has been strategically sold off in increments since Marissa Mayer stepped in as CEO in 2012.

This has been, in part, to deliver windfall gains to impatient Yahoo shareholders disenchanted by a struggling core business.

That last tranche of Alibaba shares is worth $33.7 billion. That means at a market cap around $39.07 billion, Alibaba accounts for 86.3% of Yahoo’s value.

A lot of Yahoo shareholders are in on the stock because they see Mayer giving that money back to shareholders in the form of buybacks when the final sale does happen.

And sure enough, Mayer and the financial wizards at Yahoo led by CFO Ken Goldman announced in January that Yahoo will spin off that stake sometime in the fourth quarter to avoid paying taxes on the sale. Yahoo shareholders will receive additional shares in the new entity once it is spun off.

This is what gives Yahoo its value.

It was the realization of Alibaba’s value that helped propel the Yahoo stock price under Mayer more than 200%.

Investors haven’t been piling in because they’re excited about Mayer’s new initiatives with mobile and native advertising. Yahoo is getting killed by Google Inc. (Nasdaq: GOOG, GOOGL) and Facebook Inc. (Nasdaq: FB) in online ads. That’s partly why Yahoo has seen its ad revenue fall nine of the last 11 quarters.

Instead, investors want another piece of Alibaba. So since the Alibaba IPO, the Yahoo stock price has been sensitive to moves in BABA stock.

But there are signs the Yahoo stock price is losing its value as an Alibaba stock tracker…

Yahoo stock price

How Much Has the Yahoo Stock Price Moved with Alibaba?

The accompanying chart shows how the Alibaba stock price and Yahoo stock price have moved along the same pattern – for better or worse.

YHOO stock should have had more down days – like when the company announced lukewarm earnings every quarter since Mayer stepped in.

But instead it has been days when Alibaba stock has been hurt that have hurt the Yahoo stock price – even when Mayer was doing everything right.

For example, on Jan. 27 this year, Yahoo first announced its Alibaba tax-free spin-off strategy. What should have been good news for the company – and by extension, the Yahoo stock price – was upended by news the next day that the Chinese government leveled harsh accusations against Alibaba’s flagship consumer sales portal, (essentially, China’s answer to – but bigger). Among them was a charge that vendors were using the website to sell counterfeit goods and cheap knockoffs.

Alibaba stock fell 4.4% on the day, then a further 8.8% the day after when Alibaba earnings missed expectations. This one-two punch sent Alibaba stock down 13.5% in two days. The Yahoo stock price fell 8.3% in that time.

But then as the year continued, the two stock prices have decoupled.

And it’s at the worst time for Yahoo…

You see, from the Alibaba IPO in September 2014 to the end of that year, the correlation between Yahoo and Alibaba was 0.94. That’s a near-perfect correlation, meaning Yahoo stock price and Alibaba stock price have almost perfectly moved together.

But since then, that has broken down. From the start of 2015 to yesterday’s close (Tuesday) the correlation has been 0.79. That’s still strong, but it also illustrates a divergence.

Yahoo may very well be losing its value as a tracking stock for Alibaba.

Alibaba has been struggling most of the year. And by May 6, the stock had fallen below $80. It was a 23.5% decline in 2015, and it was off its 2014 highs established in November by 33.2%. But since then, a change in CEO and blowout earnings have helped reverse Alibaba’s fortunes. Alibaba stock is up 10% since May 6.

The Yahoo stock price is a different story. It’s flat.

What has held Yahoo stock back are rumors that the Internal Revenue Service is mulling over changes to the tax law concerning spin-offs. Investors worry that a change to this tax law could affect the tax-free status of the Alibaba spin-off. That concern has kept a lid on Yahoo gains.

And it raises the question of whether the Alibaba stake is enough to buy Yahoo stock.

“I think the Alibaba value has been fully recognized; I’d have a hard time making the case to buy Yahoo at the moment,” Money Morning Chief Investment Strategist Keith Fitz-Gerald said. If you are still in it, “Use your trailing stops, manage it appropriately, ask yourself every week, ‘are the reasons why I bought this stock still intact.’ If they are, hang on, if not, time to go. Move on to better opportunities.”

And remember, there may yet be one final reason to stay in Yahoo.

“My belief is that ultimately, Alibaba buys Yahoo. I think that thing comes full circle,” Fitz-Gerald said.  Doing so would help Alibaba grow its global presence, it would, “establish brand,” and get “instant staff, instant technical compliance, instant recognition, and more importantly, instant data.”

Bottom Line: The Yahoo stock price is starting to veer from its role as a tracking stock for Alibaba. That means if you are not in Yahoo right now, you’ll want to be cautious about getting in now. If you are in it, you’ll want to manage your position carefully. In either case, though, the best thing for the Yahoo stock price would be an Alibaba purchase. Yahoo stock is slowly becoming a speculative play that hinges on this outcome.

Money MorningWritten By Jim Bach From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.

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