Business

09.26.13

Yahoo! Poised to Cash In on Initial Public Offering of China E-Commerce Giant Alibaba

CEO Marissa Mayer is getting a lot of buzz. But Yahoo!’s stock is on a roll largely because of its stake in Chinese e-retailer Alibaba—which is about to go public.
YHOO Chart

YHOO data by YCharts

Things have been heating up recently at Yahoo! (Don’t believe me? Google it).

Over the past year, as the chart above shows, Yahoo!’s stock has been on a steady rise, rising from well below $20 to now just over $32 a share – the highest level in nearly seven years. The company is now worth about $33 billion.

So what’s behind the newfound love affair? Yahoo is still basically a bit player in search, with only 11.4 percent of the market. And, according to Ad Age, changes in the ad market and a shift of users to mobile devices has led to an 11 percent decline in Yahoo!’s core business of selling big display ads.

Certainly, the big, glamorous profile of CEO Marissa Mayer in Vogue has helped bring attention to the company. The company also launched a redesign of its heavily trafficked home page. Meanwhile, it’s muscular sports and financial verticals (Yahoo Sports is consistently near or at the top of sports sites as is Yahoo Finance for business) helped push Yahoo! to top Google as the most popular website in July. And that’s not even counting the billions of page views notched by recent acquisition Tumblr.

Speaking of Tumblr, maybe the acquisition of a site with so much street cred among tech-savvy hipsters upped the company’s desirability. There have also been numerous reports about the change in culture at Yahoo, once seen as the stodgiest of the big tech companies. Another asset that could be keeping investors keen is the company’s stake in Yahoo! Japan, which is the nation’s most visited Web-portal.

But no, the real reason for interest in Yahoo! has to do with a Chinese ecommerce giant called Alibaba. As Scott Kessler of Standard & Poor’s recently put it on Bloomberg News, “To be realistic, we think a lot of the gains and a lot of the interest in Yahoo shares, are predicated on one thing, and that’s Alibaba.”
Wait. What?

Investors have long noted that Yahoo!’s holdings in Asia, particularly its stake in Alibaba, which controls roughly 80 percent of China’s burgeoning e-commerce market,were a hidden source of value. But there was never an easy way for the company to unlock that value, or for investors to understand precisely how much Yahoo! stake is worth. Alibaba is a privately-held company based in a country in which financial transparency is rare.

That’s changed in the past year. Last September, Yahoo! and Alibaba made a deal in which Yahoo! received $7.6 billion for half of its stake in Alibaba. That left Yahoo! still owning about 23 percent of the company. The cash from that deal gave Yahoo! breathing room not only with shareholders – the company spent a big chunk of the proceeds buying back shares -- but also to make purchases of rapidly growing companies like Tumblr. Both those trends are good news for the stock.

The more speculation rose about Alibaba’s plans, the more investors have been eager to invest in Yahoo! as a way of gaining indirect exposure to a rapidly growing firm. And this week, news broke that Alibaba is planning to stage an initial public offering in New York that could value the firm at as much as $75 billion. Once the shares start trading, it will be easy for investors to see just how valuable Yahoo!’s remaining stake in the company is.

Investors may want to curb some of their enthusiasm. Reports have surfaced that the real reason Alibaba decided to list itself in the U.S. instead of in Hong Kong is because the company’s founders wanted to maintain iron-clad control rather than ceding too much control to shareholders. And the record of Chinese companies going public in the U.S. hasn’t always been stellar.

But for now, investors are excited. They’re expressing their enthusiasm by putting the exclamation point back in the shares of Yahoo! Come for the media-savvy makeover. Stay for the chance to participate in the huge upside of China’s e-commerce industry.