Shares of Yahoo! (YHOO) today closed up 76 cents, or 3.5%, at $22.70 after Barclays Capital’s Anthony DiClemente raised his rating on the shares to Overweight from Equal Weight, based on the company’s minority stakes in Chinese e-commerce outfit Alibaba Group, and in Yahoo! Japan, being undervalued at the current stock price. DiClemente raised his price target on the stock to $26 from $22.
Alibaba’s valuation has probably risen to $55 billion from the $40 billion at which the company raised capital back in Q3 of last year, writes DiClemente, increasing the value to Yahoo! by $2.23 billion to $8.98 billion.
DiClemente lays out a back-of-the-envelope for valuing Alibaba:
Given the limited financial disclosure around Alibaba Group, it is difficult to assess the exact value of the company. That said, we thought it would be helpful to provide an idea of what Alibaba�s financials looked like for calendar year 2012 and could look like for 2013. We note that this is a rough estimate using limited financials and may not accurately reflect Alibaba Group�s actual financials. Given the disclosures in Yahoo!�s financials, we know that Alibaba grew revenue 71% and 74% in 2Q12 and 3Q12, respectively, with average operating margins above 30%. If we assume 1) that in 2013 Alibaba saw revenue growth decelerate to 60% (Alibaba saw revenue growth accelerate to 74% in 3Q12), 2) modest margin expansion in 2013 to 32% operating margins and 3) that depreciation and amortization is equal to 6% of revenue, versus EBAY at over 8% for FY11 and FY12, we arrive at EBITDA of $1.77 billion and $2.92 billion for FY12 and FY13, respectively. We note that this number could be conservative as there are likely other adjustments and one-time items that would need to be made in order to arrive at a more normalized non-GAAP operating income.�A $55 billion valuation for Alibaba would thus imply ~19x an estimated 2013 EBITDA of $2.92 billion.
DiClemente sees Yahoo! ultimately giving most of the proceeds of that stake to shareholders:
Excluding the $800M in preferred shares which will be redeemed within 10 years, we believe monetization of Yahoo!�s Alibaba stake will yield $8.2 billion in cash for the company. We believe that a significant portion of this cash will be returned to shareholders because: 1) we believe Yahoo! has an active and shareholder-friendly board that is focused on value creation; 2) large-scale M&A appears unlikely as Marissa Mayer has said that she prefers smaller M&A �in the size and scale of double-digit millions and low hundreds of millions�; 3) YHOO�s new management team has proven its commitment to capital returns, announcing a $3 billion return of capital in 3Q and then buying back nearly $1.5 of stock in 4Q alone; and 4) CFO Ken Goldman has stated repeatedly that buying back stock at thencurrent levels is �extremely attractive�, and though Yahoo! shares have performed well since, the company still trades at a significant discount to its peer group.
While Yahoo! is not currently planning to “monetize” Yahoo! Japan the way it is the Alibaba stake, DiClemente notes that shares of Yahoo! Japan traded in Tokyo have risen 37% since September 18th of last year, a $1-per-share after-tax value for Yahoo!, by his calculations.
Lastly, DiClemente thinks the “core” Yahoo! operations are now worth perhaps $7.78 per share, up from a prior estimate for $5.84, given improvements in things such as “cost-per-click,” the rate the company gets paid for its search ads, in light of the recent better-than-expected Q4 results.� However, he’s not counting on further improvement to boost the stock, writing “we need to see improvement in user engagement metrics and fundamentals in
order to get more constructive on the core business.”
DiClemente combines that $7.78 for the core with $18.22 in value for Alibaba and Yahoo! Japan, plus $5.6 billion in cash, to arrive at his $26 price target.
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