Yahoo! Inc. PT Upped For Alibaba’s Outlook As Data Breach Confirmed

Yahoo! Inc. PT Upped For Alibaba’s Outlook As Data Breach Confirmed
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There was a time when Yahoo was receiving a lot of attention because its stake in Alibaba, a much hotter, up-and-coming company, was getting more and more valuable. That attention died down, however, as talk of spinning off the stake began. Now Yahoo has received a fresh price target increase on the basis of an improved outlook for Alibaba as the company considers selling its core business instead.

However, the price target increase came just before Yahoo admitted to one may be one of the biggest data breaches in cyber-security history.

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In a report dated September 22, UBS analyst Eric Sheridan lifted his price target for Yahoo from $43 to $50 per share following his colleague’s price target increase for Alibaba. UBS raised its price target for the Chinese retailer from $107 to $125 due to greater expectations for its core ecommerce business. Sheridan’s colleague sees upside to take rates and brand advertising monetization and also its growing cloud and entertainment businesses.

Sheridan said in his report that because of how much of Yahoo’s valuation the Alibaba stake accounts for, the increase in its price target adds another $6 per share to his valuation of Yahoo. He used a sum-of-the-parts model for the internet company.

In addition to the higher price target for Alibaba, the UBS analyst notes that “RemainCo” a.k.a., the bits of Yahoo that will be left after the core business is sold to Verizon, will be registered as an investment firm. As a result, he believes Yahoo’s valuation will begin tracking more closely to its stakes in Alibaba and Yahoo Japan following the completion of the transaction. His firm as a price target of ¥600 per share for Yahoo Japan and uses that number in his target price for Yahoo just as he did for Alibaba.

One difference now is that he is assigning a slightly more conservative trading discount on the Alibaba shares, moving to a 37% discount from 35% previously. He explained that the timing of tax efficient monetization could take longer than he was previously expecting.

Following Verizon’s acquisition, Sheridan expects one of the main drivers of the new investment company’s stock to be the underlying performance of its two major stakes (the Japan property and Alibaba). Another key driver is if management provides any more clarity on the tax efficiency of the disposal or expected discount rate for the assets. And finally, he said any updates on the Excalibur non-core patent portfolio’s market value should help drive the shares.

He continues to rate them as a Buy, but notes that there are still some hurdles to cross before the acquisition is completed. Of course shareholders have yet to give their approval, and the deal must cross antitrust and regulatory reviews. Also the remaining assets must be successfully registered as an investment company. The transaction is expected to close by the first quarter, but until then, Yahoo will keep operating independently.

A big question now is whether Yahoo’s admission of a major data breach on Thursday will have any impact on the Verizon deal. The internet giant confirmed that data linked to at least 500 million accounts was stolen in what could be one of the biggest cyber-breaches ever recorded. Yahoo announced that it believes a “state-sponsored actor” is the culprit, meaning a hacker working for a government. The breach happened in late 2014, and the data that was stolen could have included not only names and email addresses but also phone numbers, birthdates, passwords and security questions and answers, including some that were encrypted. Yahoo has advised users to change their security questions and passwords. The company does not believe that any sensitive information such as banking or credit card information was stolen.

In a statement sent to CNN Money, Verizon said it learned of the data breach this week and that it has “limited information and understanding of the impact” beyond that Yahoo is investigating. It’s unclear whether the breach will impact the $4.83 billion deal. Not only is the breach resulting in negative headlines, regulators could become involved, and users might leave the service at a sensitive time when the company is trying to sell its core assets.

Yahoo shares slipped by as much as 2.13% to $43.21 in premarket trading this morning.

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