Time to Buy Yahoo Stock?

Over the weekend, Alibaba announced that it will price its IPO such that the company would have a 160 billion dollar valuation. Many people in the United States might not be familiar with the giant Chinese e-retailer. I’d include myself in that group. In fact, I had no idea how big the company is in China…

… until this morning.

I just read that Alibaba sells more than Amazon and Ebay combined. I suppose it isn’t surprising given the huge Chinese audience, but Amazon and Ebay operate in at least 8000 counties combined (I’m obviously exaggerating).

So what’s with this title about Yahoo, right?

Well, Yahoo owns a quarter of Alibaba’s stock. So when Alibaba goes public it could unlock $40 billion of value for Yahoo. Yahoo has had this ownership stake for a long time, so this isn’t exactly news. Perhaps the ownership was built into the stock. However, when I look at Yahoo’s market capitalization, it appears that the entire company is only worth $40 billion. (Though that could change with this Alibaba news this morning.)

What this appears to mean to me is that investors are getting Yahoo’s business for free. Update: As I’m typing this, I’m reading that Yahoo is going to sell 121.7 million of its Alibaba shares for around $8 billion and retain a 16.3 ownership stake, which by my calculation would be worth another 26 billion. So not really “for free”, but that’s 34 billion of value in Alibaba and cash for a company that appears to be worth 40 billion total.

So the question becomes, is Yahoo worth buying as a $6 billion company? It doesn’t seem like it’s a bad business. The price/earnings ratio at its current market cap is 34. That isn’t super, but it’s not like Twitter’s non-existent one or Amazon’s 900+ one… and those are two pretty good companies themselves. (One can just argue that they are priced expensively.) Those earnings would look amazing for a $6 billion dollar company though… probably bring it to a P/E of around 6. (Note to investing gurus: Please check my math.)

I remember more than decade ago, the CIO of the huge dot-com company I worked for said to buy DoubleClick stock. I wish I remembered the context, because it wasn’t like I had that many conversations with him. It didn’t make any sense as every stock related to the Internet was getting slaughtered… and this company relied on that whole economy. He explained that they were sitting on so much cash, that the company itself was being valued at nothing. I figured the only way I could lose was if they started sinking that cash into the business with a series of poor decisions that didn’t prove valuable. It seemed like it was worth the risk to buy it and hope that things come back. It turned out that way too with the stock performing well and eventually getting bought by Google.

This situation reminds me a little bit of Yahoo. If you get the company “for free” and they don’t make terrible decisions with their money, it has some potential, right?

So what do you think, let me know in the comments.