The excitement among Yahoo! Inc. (NASDAQ:YHOO) investors over Alibaba Group Holding Ltd (NYSE:BABA) public offering is over. Perhaps Yahoo’s 22% stake in the Chinese company was the only reason people were interested in Yahoo. Shares of the U.S. technology company have fallen close to 9% since Alibaba went public by raising a record $25.03 billion.
Investors can now buy Alibaba directly in the open market
Yahoo shares declined 5.57% on Monday to close at $38.65, and fell another 1.63% in pre-market trading Tuesday to $38.02. On Monday, a whopping 106 million Yahoo shares changed hands, almost triple the daily average. Yahoo’s shares had soared more than 25% since June 25 until last Thursday as it was one way investors could benefit from the Chinese e-commerce juggernaut.
Now that investors can buy Alibaba in the open market, there is no reason to buy Yahoo stock, said AlphaOne Capital Partners founder Dan Niles. The company is still struggling to jump-start ad revenue growth despite dozens of acquisitions. Its total revenue has declined in four of the last five quarters. Moreover, its shares trade at a lofty valuation. According to FactSet, Yahoo stock is trading at 27 times its FY2015 earnings estimates.
How will Yahoo use its Alibaba proceeds?
The Marissa Mayer-led company sold 121.7 million Alibaba shares last week. It still owns 16% stake in the Chinese company. Yahoo generated over $9 billion from selling part of its stake in Alibaba. The company has promised to return at least 50% of after-tax proceeds to shareholders, most likely in the form of buybacks. But the company hasn’t said what it will do with the remaining $3 billion or so of Alibaba proceeds.
Analysts believe Marissa Mayer could use that money on acquisitions. Pressure is mounting on Mayer to make good use of this money. On Monday, Bernstein analyst Carlos Kirjner downgraded Yahoo stock from Outperform to Market Perform. Kirjner estimates that the U.S. company’s current stake in Alibaba is worth $34 per Yahoo share before taxes. On a fully taxable basis, it’s worth $21.
Kirjner said buying Yahoo at $40 or higher means investors must believe that Yahoo management will transfer the remaining Alibaba proceeds “tax-efficiently.”