Forget Panama…China lifts Yahoo
Don’t look now. But shares of Yahoo (YHOO) have surged in the past few weeks and are now trading at a 52-week high. The stock has soared 26 percent since the company reported third-quarter earnings that beat analysts’ expectations on Oct. 16.
It’s been a volatile year for Yahoo. But shares are now up more than 32 percent so far in 2007 .
Some of the new-found enthusiasm certainly is due to hopes that the worst may be over for Yahoo. Co-founder and new CEO Jerry Yang gave Wall Street some insight into how Yahoo intends to win back ground in the online search business against Google (GOOG) and stay ahead of emerging competitors such as Microsoft (MSFT), News Corp.’s MySpace and Facebook.
Yahoo’s Panama search platform for advertisers is leading to more relevant search results and that is boosting revenue per search query for the company. Investors also seem to be optimistic that Yahoo’s tweak to its consumer search engine will help the company regain market share it has lost to Google.
Still, not all of the bullishness about Yahoo can be attributed to a sense that the company is back on track from a fundamental standpoint. It’s no coincidence that Yahoo’s rise has coincided with the hype for the upcoming stock debut of Chinese online business-to-business commerce site Alibaba.com. Yahoo owns a 39 percent stake in Alibaba Group, the parent company of Alibaba.com.
Alibaba will begin trading on the Hong Kong Stock Exchange on Nov. 6. According to several reports, Alibaba sold 17 percent of its shares in the initial public offering. The company raised $1.5 billion, making it the largest Chinese Internet IPO ever and second largest Internet IPO behind only Google’s in 2004.
Chinese Internet stocks that trade in the United States have been phenomenal performers this year, so hopes are high that Alibaba will also be a big hit once it starts trading. Shares of Chinese search leader Baidu (BIDU) have more than tripled this year, while shares of portal Sina (SINA) have doubled.
To be sure, Alibaba is not an online advertising play the way that Baidu and Sina are. Success for Alibaba will depend more on e-commerce in China. But so far, Alibaba appears to have emerged as one of the top e-commerce companies in China.
Jeffrey Lindsay, an analyst with Sanford C. Bernstein, pointed out in a recent report that Alibaba’s revenues have increased at a compounded annual growth rate of 82 percent between 2004 and the first half of 2007. Only Baidu has topped that growth rate.
As such, some analysts are confident the Alibaba IPO will highlight just how strong the growth prospects are for online retail in China and reinforce to investors that Yahoo stands to benefit immensely from this trend. If Alibaba turns out to be as successful in China as, say, eBay (EBAY) has been in the U.S., that could provide a big boost to Yahoo.
“We believe the Alibaba.com IPO will shine a light on hidden value in YHOO’s Chinese investments,” wrote American Technology Research analyst Rob Sanderson in a research note.
“Chinese Internet companies show similar growth and development parallels as the U.S. did in 2000. In the following seven years, eCommerce activity in the U.S. erupted and assets like Google, eBay, PayPal and others saw enormous value creation. While in 2000 the U.S. had better infrastructure to support eCommerce than China does today (i.e. credit cards), China has already surpassed the U.S. as the largest broadband region. Great opportunity is reflected in the public market valuations of Chinese Internet companies,” Sanderson added.
Sanderson concluded that Yahoo’s investment in Alibaba Group could wind up adding $13-$15 a share to Yahoo’s stock over the next three to five years. That’s because he believes the Alibaba.com offering could pave the way for IPOs of other Alibaba Group assets as well.
In addition to the B2B commerce site, Alibaba Group also owns auction site Taobao, which has been described as China’s eBay (EBAY); AliPay, an online transaction service similar to eBay’s PayPal; and Alimama.com, an online ad exchange. Alibaba Group also owns 53 percent of Koubei.com, a classified listings site along the lines of Craigslist.
But other analysts say investors should be cautious since much of the Alibaba news may already be priced into Yahoo’s shares.
“Some of the Alibaba upside may have already been reflected in the valuation,” wrote Jefferies & Co. analyst Youssef Squali in a research report about Yahoo - although he conceded that Yahoo’s stock should head even higher if Alibaba winds up having a blockbuster debut on Nov. 6.
And William Morrison, an analyst with ThinkEquity Partners, wrote in a recent note that he thinks a fair value for Yahoo’s stock is only about $32 a share - below its current price. That’s based on the fundamentals for Yahoo’s core business as well as its investments in Alibaba, Yahoo! Japan and Gmarket (GMKT), a Korean online commerce site.
Nonetheless, these estimates may turn out to be very conservative. Robbert Van Batenburg, head of global research for Louis Capital Markets, an institutional broker, said that it’s not unreasonable to expect Alibaba to begin trading in Hong Kong at a 50 percent premium to its offering price. If that happens, he calculates that could add another dollar per share to Yahoo’s stock price.
So he thinks that as long as Alibaba doesn’t disappoint, this could be just the beginning of a resurgence for Yahoo’s stock. He added that the strength in China could even help cushion the stock in case Yahoo once again stumbles in its effort against Google in the U.S. search market.
“Yahoo’s had a nice run but Chinese IPOs have done extremely well, so subsequently there is more upside to Yahoo if Alibaba gets off to a flying start,” Van Batenburg said. “And for a company that’s been sloppy on execution for the past few years, this is a big plus, a big windfall. This could be a great long-term story, since Yahoo is a fairly safe back door play on the Chinese Internet market.”