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YHOO - Yahoo Inc.

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Guest valueInv

Guest valueInv

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On the flip side of their nicely designed programs like their weather app, their recent redesign of Yahoo Sports and fantasy sports is pretty awful, and they are getting a lot of criticism of it.

 

Any links?

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bmichaud Newbie

bmichaud

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I'm curious why YHOO's stock price is so strong...

 

A) Perhaps it's just the last final speculative push into a $100B Alibaba IPO,

 

B) Yahoo! management is cooking up a strong financial engineering move, or

 

C) Mayer's attempt at "monetization" is finally paying off

 

 

Third Point's exit continues to puzzle, and I just cannot imagine they would have exited before a massive financial engineering transaction - thus I think B is likely off the table. Valuing Yahoo!'s "core" at 8X 1.675B ebitda makes it less ~35% of the total FVPS calculation, so I doubt there is much Mayer can do to boost an 8X multiple and/or 1.675B of ebitda in order to strongly move the valuation needle.

 

So my guess would be an IPO is near and the stock is rallying into the news.

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Guest wellmont

Guest wellmont

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agreed. the ipo market is extremely strong. alibaba is the driver of the stock price imo. I think loeb is just reloading for the next down cycle by not extracting every last penny from yhoo (klarman). he probably believes the valuation is dependent upon strong global liquidity and animal spirits. Don't believe he liked the tumblr deal either. :)

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gary17 Newbie

gary17

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bmichaud -

just looking at this - 

 

- yahoo's 35% stake in yahoo japan is worth about 22B

- alibaba is 24% of let say 100B = 24B

 

so the asian assets total 46B . let's say after tax (38%?) that's 28B

 

- yahoo's net income is about 1B, but i believe that includes about 80M of dividend from japan so let's say net income is 900M (without japan)

 

so if yahoo at today's value of 32B sold off it's asian assets, paid tax, it's let with a 4B US business that's making 900M a year...? 

 

this seems ridicules cheap that i must have missed something????  :o

 

Call me crazy, but I believe YHOO is potentially just as interesting here at ~$27 as it was at ~$16.

 

1. Alibaba valuation now comfortably around $100B v. $50B in 2011/early 2012 - Stifel values Alibaba at 25X 2016 earnings ($180B valuation) and discounts it back 20% per year to get to $100B today. Seems reasonable to me given the outrageous growth potential Alibaba has....

 

2. Yahoo! Japan is trading at $16 per ADR versus less than $12...

 

3. YHOO has a USD/JPY hedge on to the tune of something over $3B....

 

4. Mayer is firmly committed to not making a "big splash" acquisition, the rumor of which drove the stock down from $16.30ish to below $15....

 

5. Core operations generate $1.794B of projected 2014 EBITDA - this should be valued at 6X (AOL's multiple) today, and perhaps it is worth upwards of 10X in a NewsCorp/Disney/MSFT/Apple etc... etc... take-over?

 

If YHOO's Asian assets are treated as "cash" in a net debt calculation, at a 35% tax rate on the Asian assets YHOO has upwards of $26B of debt capacity - it can virtually take itself private.

 

If a 17.5% tax rate is assumed on the Asian assets, the debt capacity is in the mid-$30Bs. At a 30% premium to $27 per share in a Dutch Tender, YHOO is left with fewer than 200MM shares outstanding.

 

Third Point got into YHOO at around $13 (and has bought up to $16 I believe) - so the position has doubled...it is the largest position in the fund, and I personally do not believe they would put on such a large bet for a mere double. Loeb is not dumb - the financial engineering potential for YHOO is absolutely phenomenal, and I don't see how Third Point would pass up such an opportunity.

 

Not to mention, YHOO will hold a 12% stake in Alibaba post-IPO, which should grow to $180B from the current estimated $100B.

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bmichaud Newbie

bmichaud

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LTM EBIT is around $763MM, which is before any income from affiliates (see attached). At a 35% tax rate net income is $496.

 

So backing out net cash of 1.27B (after unearned revenue and LT deferred taxes) and the after-tax asian assets of $28B from a 32.47B market cap, the adjusted cap is $3.2B, and the adjusted PE is 6.5X.

 

I'm also not sure I would value the entire Alibaba stake at $100B, since rumors are for a $70 to $80B IPO and Alibaba can buyback half of Yahoo!'s stake (or something like that). Later on Yahoo! will likely realize $100B, and if Alibaba trades up to $150B then the average realized value may be $100B, but I would rather be conservative and say $80B in total at this time.

Yahoo_Inc_NasdaqGS_YHOO_Financials_Income_Statement.xls

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gary17 Newbie

gary17

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i think there's risk china is a bubble - but yahoo can hold on to its 50% shares that it doesn't need to sell after IPO

 

my friends working in china give me conflicting stories -

 

but i'm more interested in Yahoo's core business

 

let say Alibaba is really just worth 50B - so 24% = 12

Yahoo Japan - 22

 

Asian asset = 34B -> after tax = 21B

 

That leaves yahoo a 11B business generating 500M a year -

 

I think of the online business as this: 

 

fb - user generated / social media content

news web sites

google for searches

 

and then there's yahoo - it's basically an online flyer with all kinds of info - 

 

if we have 8h a day available browsing the web (smart phone, ipad, pc at work, etc) - that's a lot of time users will want to look at contents in addition to facebook / twitter -    and yahoo is a logical next choice. 

 

 

 

 

 

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gary17 Newbie

gary17

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bmichaud

i read through yhoo's 10-Ks and based on my reading the affiliates are simply affiliates. it does not appear yahoo receives any revenue from alibaba or yahoo japan, other than the dividend from yahoo japan.    if this is not the case, i'm not finding where it states the revenue source... or defines who those affiliates are.

 

so if this is the case, then without alibaba and yahoo japan, yahoo should still be earning 900M, not 500M. 

 

so if we assume the new ceo can maintain the top and bottom lines and keeping up with inflation and let's just say yhoo is around for another 15 years  that's worth about 13.5B.

 

plus the asian asset of 21 ~ 28B after tax  that's about 34.5B ~ 41.5B is what i think yhoo is worth.   

 

but would have been smarter if bought last year when it was half price

 

 

LTM EBIT is around $763MM, which is before any income from affiliates (see attached). At a 35% tax rate net income is $496.

 

So backing out net cash of 1.27B (after unearned revenue and LT deferred taxes) and the after-tax asian assets of $28B from a 32.47B market cap, the adjusted cap is $3.2B, and the adjusted PE is 6.5X.

 

I'm also not sure I would value the entire Alibaba stake at $100B, since rumors are for a $70 to $80B IPO and Alibaba can buyback half of Yahoo!'s stake (or something like that). Later on Yahoo! will likely realize $100B, and if Alibaba trades up to $150B then the average realized value may be $100B, but I would rather be conservative and say $80B in total at this time.

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myvalueedge Newbie

myvalueedge

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bmichaud -

just looking at this - 

 

- yahoo's 35% stake in yahoo japan is worth about 22B

- alibaba is 24% of let say 100B = 24B

 

so the asian assets total 46B . let's say after tax (38%?) that's 28B

 

- yahoo's net income is about 1B, but i believe that includes about 80M of dividend from japan so let's say net income is 900M (without japan)

 

so if yahoo at today's value of 32B sold off it's asian assets, paid tax, it's let with a 4B US business that's making 900M a year...? 

 

this seems ridicules cheap that i must have missed something????  :o

 

Call me crazy, but I believe YHOO is potentially just as interesting here at ~$27 as it was at ~$16.

 

1. Alibaba valuation now comfortably around $100B v. $50B in 2011/early 2012 - Stifel values Alibaba at 25X 2016 earnings ($180B valuation) and discounts it back 20% per year to get to $100B today. Seems reasonable to me given the outrageous growth potential Alibaba has....

 

2. Yahoo! Japan is trading at $16 per ADR versus less than $12...

 

3. YHOO has a USD/JPY hedge on to the tune of something over $3B....

 

4. Mayer is firmly committed to not making a "big splash" acquisition, the rumor of which drove the stock down from $16.30ish to below $15....

 

5. Core operations generate $1.794B of projected 2014 EBITDA - this should be valued at 6X (AOL's multiple) today, and perhaps it is worth upwards of 10X in a NewsCorp/Disney/MSFT/Apple etc... etc... take-over?

 

If YHOO's Asian assets are treated as "cash" in a net debt calculation, at a 35% tax rate on the Asian assets YHOO has upwards of $26B of debt capacity - it can virtually take itself private.

 

If a 17.5% tax rate is assumed on the Asian assets, the debt capacity is in the mid-$30Bs. At a 30% premium to $27 per share in a Dutch Tender, YHOO is left with fewer than 200MM shares outstanding.

 

Third Point got into YHOO at around $13 (and has bought up to $16 I believe) - so the position has doubled...it is the largest position in the fund, and I personally do not believe they would put on such a large bet for a mere double. Loeb is not dumb - the financial engineering potential for YHOO is absolutely phenomenal, and I don't see how Third Point would pass up such an opportunity.

 

Not to mention, YHOO will hold a 12% stake in Alibaba post-IPO, which should grow to $180B from the current estimated $100B.

 

You have to remember that the YHOO Japan stake was only worth around $7B 2 years ago.  The declining yen and rising Nikkei market has catapulted the price of YHOO Japan.  You should apply a discount to the sum of the parts valuation imo considering how/why the YHOO Japan stake is so highly valued.   

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jturro Newbie

jturro

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garychen17, how do you get to a value of 22B for Yahoo's 35% stake in Yahoo Japan? I just looked at the latest figures and got much lower numbers than that (the stock price as of today is 559 JPY and there are 5.8B outstanding shares, which results in a total market cap of $33B and  a value of $11.6B for Yahoo's stake). Am I missing something?

 

Thanks.

 

I'm long Yahoo.

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gary17 Newbie

gary17

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thanks for catching this

i was working off a spreadsheet someone had posted earlier without checking

 

i think yahoo japan should be 50% of what i indicated or 11B.

 

so alibaba and yj should be about 35B or 21.7B after tax

 

then at 35B today the core business has a market price of 13.3B generating about 1B income. 

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Guest wellmont

Guest wellmont

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instead of talking about what the markets think yahoo japan and alibaba are worth, what would a rational investor who was going to buy the whole thing think they are worth (pmv)? once you arrive at that (after tax) you can back into a proper valuation for core yahoo. maybe the markets have it right on yahoo's asian assets.

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gary17 Newbie

gary17

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i think yahoo is fairly priced today looking at balance sheet

 

but if we factor in the income it is expected to generate over its lifetime, it's undervalued.  but i have no way of knowing if yahoo is relevant in 10 years. 

 

it'd have been a 'no brainer' at $20 or less but at $34 i need to think real hard about it -

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jturro Newbie

jturro

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wellmont, I think you're right and we should probably not be giving so much importance to what markets say about the value of the Asian assets and Yahoo's core business. However, in this case there's so much uncertainty that I think it's extremely difficult to value the company the way you propose. Just thinking out loud:

 

Alibaba group is a relatively new business growing at a very high pace and similar companies (Facebook, Amazon, etc.) are being valued at multiples that would be very difficult to justify for an investor who wanted to buy the whole thing.

 

Yahoo's core business is in the middle of a turnaround so it's also very difficult to estimate the free cash flow it will be generating in 5 years from now.

 

I haven't looked that much at Yahoo Japan. It seems to have done pretty well during the last years but at a PE of 26 it seems to be more than fairly valued.

 

At this point I think the potential of this business/stock is in Alibaba's very high growth rate (and the possibility it can maintain it for a while) and the possible positive outcome of Mayer's turnaround efforts. The margin of safety there was two years ago does not seem to exist anymore, but if you believe Alibaba and Yahoo's core business can do very well in the next 5 years I think there's still potential. It's a bit of a bet, not a typical value investment with a clear discount. I'm gonna continue to be long yahoo but monitor carefully the result of the turnaround efforts in the next 2-4.

 

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Guest wellmont

Guest wellmont

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thank you for helping me make my point. :) a business with that much uncertainty and risk really should have a Lower multiple. not a higher one. that's not me saying that. It's Bill Gates. my method provides margin of safety. using market values does not imo. having said that, you could do a lot worse than invest in yahoo. you could invest in yelp, angie's list, or red hat, for example.  :o

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