Are Yahoo! (YHOO) Investors Ready to 'Sell the News'? Analyst Weighs In
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Rating Summary:
18 Buy, 21 Hold, 5 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 9 | Down: 10 | New: 43
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Of course you've heard about Alibaba's (NYSE: BABA) IPO today. However, what you might not be focused on is what that means for Yahoo! (NASDAQ: YHOO), a very large holder of the stock that seen its fortunes turn around based on Alibaba's success. Yahoo!'s stock is near multi-year highs given the value of its Alibaba stake and as investors sought a way to play Alibaba pre-IPO. For Yahoo!, many on Wall Street are expecting a "Buy the Rumor... Sell the News" reaction in the stock today. Simply put, you buy the stock ahead of the event and sell it as the event occurs. Some suggest this type of selling can tank Yahoo! shares by 3-8% today.
Meanwhile, Macquarie analyst Ben Schachter had a thoughtful sum-of-the-parts (SOTP) analysis of Yahoo ahead of the event. Schachter notes that Yahoo's 140 million shares sold in the IPO will yield $9.5 billion pre-tax, or $5.9b billion net of 38% tax (~$5.80/shr). Post the IPO YHOO will own 384 million shares of BABA. Based on the firm's analysis, Yahoo! could be worth as little as $36.14/share under a fully-taxed Asia asset scenario if BABA trades at $70/share and as high as $60.43/share on an untaxed Asia asset scenario if BABA gets to $100/share. Below are all of his assumption at different BABA price levels.
"Clearly, tax remains a key issue," the analyst comments. "And while finding tax efficiencies has been the holy grail of innumerable investment professionals for many, many years, post-IPO there are new options available. The final tax status, unfortunately, remains unclear, but we are cautiously optimistic that Malone-esque options can be found to limit taxes"
Beyond the tax issue, post IPO, the analyst will focus on:
) The open question as to how much of YHOO’s remaining stake in BABA will be returned to shareholders. We think investors expect 50%-80% returned (the lockup may prevent distributions for 1 yr – depending on structure).
2) With BABA now available directly, YHOO’s shareholder base will be impacted. We think few want to bet on YHOO’s core turnaround. We don’t.
3) LT structural and competitive issues for its core search and display businesses.
He summed it up: "The bottom line is that BABA can finally be marked to market, but tax issues and use of proceeds are unresolved. We are also concerned that post-BABA IPO, investors will no longer need YHOO to own BABA indirectly, thus impacting the shareholder base. Additionally, our longstanding concerns on YHOO’s core (search and display) businesses remain. Once BABA shares begin trading today, our scenario analysis will inform future YHOO opportunities."
The firm has an Outperform rating and price target of $40 on Yahoo!
For an analyst ratings summary and ratings history on Yahoo! click here. For more ratings news on Yahoo! click here.
Shares of Yahoo! are up 1.8% early to $42.86.
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