Yahoo Shareholders’ Fortunes Hinge on Alibaba IPO

By Jon Friedman | October 11, 2013 AAA

For Yahoo's shareholders, the key for the remainder of 2013 can be summed up in one word: Alibaba.

The Chinese e-commerce and auction house, in which Yahoo (Nasdaq:YHOO) owns about a 24% stake, is planning to hold a much-discussed initial public offering. That much is clear.

There is another word in the equation: uncertainty. In fact, there is lots of uncertainty hanging over Alibaba’s prospects. This is what makes the story so compelling for journalists and maddening for Yahoo stockholders.

The question, which bedevils and tantalizes Yahoo holders, is: When, exactly, will it take place?

The timing of the IPO is now all-important. This was hammered home on July 17 when Yahoo's stock jumped 9% as it distributed financial information on its Alibaba investment. Year-to-date, Yahoo shares have added about 70%, with Alibaba playing a big factor in the rise.

If the timing isn’t maddening enough to contemplate, there is more. Geography has been a puzzle, too. Reuters reported on Oct. 10 that Alibaba CEO Jonathan Lu said that Alibaba won’t list its stock in Hong Kong but hasn’t yet decided on any other exchange.

Founded in 1999 by billionaire Jack Ma, Alibaba had intended to list on the Hong Kong exchange in an IPO that could raise an estimated $15 billion.

Then there is also the subtle but potentially crucial point of how market psychology could play a role. Should we call this “The Facebook Effect?”

Leading up to Facebook’s (Nasdaq:FB) May 18, 2012 IPO, Wall Street and the media all but waved pompoms at the site of CEO Mark Zuckerberg’s trademark hoodie. Euphoria was in the air because Facebook, in its brief history, had already achieved an important place in the global popular culture. Everyone loved using Facebook, right? Naturally, the stock market would also drink the Facebook Kool-Aid, right?

But the Facebook IPO was plagued on day one by trading glitches at the Nasdaq. Then the shares experienced a prolonged plunge, before staging a comeback. In the aftermath, it’s fair to conclude, the investment community has chosen to be wary and cautious when it comes to making forecasts about IPOs.

“Sure, it’s possible that there has been some residual taint from Facebook,” that could affect an IPO of Alibaba, said Michael Holland, who heads the New York money management firm Holland & Co. “This can happen in the market when there is such a negative development that sticks in people’s minds.”

Of course, the revival of Facebook’s stock has helped investors forget about the stock’s early travails.

Since early last month, Yahoo's stock has registered a roughly 20% jump, versus marginal gains by the Standard & Poor's 500 Index. Brian Wieser, an analyst with Pivotal Research Group, noted in a recent investor report on Yahoo, that $6 of the $7 in gains during that period have stemmed from the possibility that Alibaba will go public and Yahoo will reap gains from the event (with the remaining $1 coming from progress in Yahoo's Japan operations).

There has been such a climate of confusion surrounding the Alibaba IPO - when will it happen, and where will it take place? The actual IPO event will finally remove the uncertainty that has clouded Yahoo's picture. The outcome of the IPO will make it easier for any Wall Street analyst to deliver a clearer evaluation of Yahoo. Pivotal analyst Wieser wrote that "there is a lot of 'fuzz' in any Alibaba valuation, given the limited information available on the company at this time, the remainder of gains seems potentially aggressive."

Wieser pointed out that he has upped his year-end 2014 Yahoo price target to $30 from $27 because he feels optimistic that an Alibaba IPO, whenever it takes place, will improve Yahoo's prospects.

The other big Yahoo news is the prospect that it will be buying back a chunk of its shares. As of the third quarter, Yahoo had 1.095 billion shares outstanding and about $6 billion in cash and investments, notes S&P's Kessler.

Since Marissa Mayer’s arrival last year as CEO, Yahoo has been on an acquisition binge. The deals have ranged in size and scope from $30 million for Summly – a mobile-app operation founded by British teenager Nick D’Aloisio -- to $1.1 billion for the blogging site Tumblr.

The plot thickened when hedge fund Third Point agreed in July to sell two-thirds of its Yahoo holding back, equaling 40 million shares, to the company for $29.10 a share.

Wieser noted in his report that Yahoo Chief Financial Officer Ken Goldstein had “implied” at an investor conference not long ago that the company would most likely be using its cash on hand on buying back some shares of its stock. Yahoo’s media relations department hadn't responded to a call for elaboration at press time.

The Bottom Line

So, where does all of this speculation and intrigue leave Yahoo’s shareholders? They certainly can’t complain about the returns they’ve been getting. It always feels sweet to trounce the S&P 500. And considering Yahoo’s recent history of chaos and confusion in the executive suite, they can also feel vindicated that the stock market is recognizing the potential of Yahoo.

But is that sufficient to impress Wall Street? It would seem that the prospect of Alibaba going public – whenever that happens – and the likelihood of buying back Yahoo stock might not be enough to count on.

Until Yahoo delivers a coherent operating growth strategy, shareholders must remain content to watch and wait.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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