Alibaba Holdings confirmed last week that its plans to hold an IPO on a US Exchange are already underway, confirming speculation that it would switch venues to the US after it became clear that the Hong Kong Exchange’s rules would have prevented the company from offering tiered stocks with different voting rights. Many investors are eager to find out what the starting price will be for the Chinese online retail giant, but the IPO could also drive other stock prices in the tech sector – especially Yahoo! Inc. (NASDAQ:YHOO), which owns a 24% stake in Alibaba.
Yahoo valuation depends heavily on Alibaba market cap
“We believe YHOO’s current valuation implies a market cap for AG of ~$150bn or ~27x CY15E P/E, as well as that Yahoo! will be fully-taxed on its proceeds from the sale of its stake in AG,” writes Citi analyst Mark May in a March 17 report. “We estimate every ~$10bn in additional market cap for AG adds ~$1.30/YHOO share.”
May believes that Alibaba is more likely to be valued in the $170 billion – $200 billion range, which would mean that the current Yahoo! Inc. (NASDAQ:YHOO) stock price is undervalued by as much as $6.50 per share. He also argues that Yahoo can further increase the boost to its stock price with a tax-efficient sale of its stake in Alibaba. May reiterates his Buy rating of Yahoo with a $46 price target (currently $38.3). May cautions that there are still a number of unknowns, and he won’t be able to refine his price target for Yahoo until Alibaba files its IPO documents revealing detailed financials, its ownership stake in various Chinese internet firms, and Yahoo’s fully diluted ownership stake (which could be less than 24%).
Alibaba IPO could boost other tech firms
The early focus has been on Yahoo! Inc. (NASDAQ:YHOO), since Alibaba is estimated to make up as much as 60% of Yahoo’s market value, but the IPO could be a catalyst causing multiple expansion for other tech companies. If Alibaba approached the $200 billion mark that May thinks is possible, Amazon.com, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) in particular could benefit as they would suddenly have an indirect competitor trading at a significant premium.
“While in recent years there have been several Internet companies rise to or go public at market caps above $10bn, there are still only about 15 large-cap public Internet companies (and only 5 with >$50bn market caps),” writes May.
Alibaba will be entering the market at the top end, possibly giving room for the stock price of other large cap tech firms to rise.