Technology

Yahoo Research Upside Tied to Alibaba and Verizon After Earnings

Jon C. Ogg

Published: January 24, 2017 11:05 am

Last Updated: January 12, 2020 3:35 pm

With earnings season in full swing, there have been many analyst reviews of key companies in the wake of their quarterly results. One such review is in Yahoo! Inc. (NASDAQ: YHOO). While its earnings may be a backdrop to the still-pending acquisition of Yahoo by Verizon Communications Inc. (NYSE: VZ), the reality is that this has deep ties to a sum of the parts analysis that ties directly into Alibaba Group Holding Ltd. (NYSE: BABA).

Verizon just had a rather muted earnings report wherein subscriber additions were lower than expected. In the conference call, Verizon’s chief financial officer said point blank: “we have not yet reached any final conclusions yet.” Alibaba shares were last seen trading up 3.3% at $101.66, and this ties in to what will be left of Yahoo after the web portal assets get sold to Verizon.

24/7 Wall St. has already covered all three earnings reports. What is of interest in the wake of these reports are some of the tidbits buried inside of the multiple analyst research reports and the commentary made by the companies. Credit Suisse has an Outperform rating on Yahoo, and the firm raised its target to $50 from $49 in that call. On how it values the company, Credit Suisse said:

While the results at the core were overall better-than-expected, fundamental results understandably take a back seat as investor focus remains on incremental updates to the status of the acquisition proposal from Verizon. … In light of the offer already on the table from Verizon, we eschew our traditional DCF-based valuation methodology and move to sum of the parts which reflects – $4.83b for core Yahoo, $6.4b in net cash, $36.9b for its ownership on Alibaba and Yahoo Japan shares (exchange rate ~113 USD/JPY) – at an assumed 20% liquidity discount to the current market prices. As a result, our price target is now $50 versus prior $49.

Merrill Lynch has a Buy rating and its price objective of $56 in a sum of the parts (SOTP) analysis and listed it as a top tax idea. The firm’s Justin Post said:

Yahoo remains a top idea on tax opportunity and valuation upside. Our base-case SOTP valuation is $49 (16% upside potential) using BABA’s current price of $98.41 with a 20% discount and 38% tax on Yahoo Japan. For our price objective valuation at $56 (32% upside potential), we use BofAML Analyst Eddie Leung’s 12-month Alibaba price objective of $118 (with the same 20% discount) and a 38% tax on Yahoo Japan. If we apply a 15% tax to Alibaba and Yahoo Japan, our SOTP valuations go up by another ~$4/share (8%).

Pivotal Research has a Hold rating and $41 price target. Its view is a SOTP case, and the report said:

Whatever the number, it matters relatively little given the company’s stakes in Alibaba and Yahoo Japan, which we value at $37/share using current trading prices less 25% discounts for illiquidity and uncertainty around the taxes that will ultimately be owed (assuming those discounts away would allow us to calculate a $49/share value). We also note that we are applying an additional element of conservatism to our valuation, by not explicitly including the value of the Excalibur patent portfolio.

JMP Securities said:

We maintain our Market Perform rating on shares of Yahoo! after the company reported fourth quarter results that came in better than our and consensus projections on both revenue and EBITDA.

Two other analyst calls were seen as well, but without details:

• UBS has a Buy rating and raised its target to $50 from $49.
• RBC Capital Markets has a Market Perform rating but it lowered its price target to $43 from $45.

Yahoo shares were last seen trading up 3.5% at $43.90 late Tuesday morning, in a 52-week range of $26.15 to $44.92. Alibaba was up 2.5% at $100.89, and Verizon shares were down 4.1% at $50.26.