According to Piper Jaffray analyst Gene Munster, Yahoo! Inc. (NASDAQ:YHOO) is undervalued, and the upcoming Alibaba IPO is likely to be a catalyst to unlock some shareholder value.

Yahoo

Yahoo’s core business is still “challenged,” but its stake in Alibaba is “undervalued at its current price,” Munster wrote in an investment report released today, June 30th.

“We expect that as we get nearer the Alibaba IPO, a more realistic valuation should be reflected in YHOO,” Munster continued.

Upgrading Yahoo from Neutral to Buy

In the Piper Jaffray investment report published earlier today, Munster laid out his thesis for upgrading Yahoo from Neutral to Buy and increasing his price target on the technology firm’s shares from $37 to $43.

Details on the Piper Jaffray upgrade

The main thesis of the Piper Jaffray report is that Alibaba is significantly undervalued, which makes Yahoo! Inc. (NASDAQ:YHOO) undervalued as well given its large stake in the Chinese Internet giant. Yahoo owns a 23% stake in Alibaba (based on a $1 billion investment in 2006) and plans to sell 40% of that stake in Alibaba’s upcoming IPO.

Chinese e-commerce titan Alibaba is expected to raise up to $20 billion in its IPO. Most analysts concur that market value of the rapidly growing firm is somewhere between $168 billion and $195 billion. Munster valued Alibaba at $221 billion including cash in his report. However, NYU finance professor and stock analyst Aswath Damodaran valued the firm at $142 billion just last week.

In the report, Munster explained that he figured Alibaba’s potential valuation based on comparisons to similar companies. Munster said he compared Alibaba to a variety of e-commerce companies such as Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), and China Internet companies such as Baidu (NASDAQ:BIDU), Qihoo 360 (NYSE:QIHU) and YY (NASDAQ:YY).

On the basis of those comparisons, the “implied valuation of Alibaba would be $214B, or $221B including its current cash balance,” wrote Munster in the report.

Yahoo! Inc. (NASDAQ:YHOO) shares have responded nicely to Munster’s upgrade, and are trading up almost a dollar at $35.20 as of 2:45 PM ET today.