Stifel analysts Jordan E. Rohan, Michael B. Purcell and Alex Chavdaroff reiterate Buy ratings for Yahoo! Inc. (NADAQ:YHOO) as Alibaba’s IPO process gets delayed.
We believe the Yahoo sum-of-parts appreciation thesis will continue to work in 2014 and have increased our target price from $40 to $49. A few weeks ago, there were reports of a delay in Alibaba’s IPO (from 2Q14 until 2015) — that would be a clear positive for Yahoo! Inc. (NADAQ:YHOO) as the Alibaba valuation continues to grind higher. In our new $49 target price, we are now incorporating a 50% probability that Yahoo’s second tranche of Alibaba shares are distributed to shareholders tax-efficiently. The extra time provided by a delay in the Alibaba IPO process could give Yahoo more time to effect a tax-free Split-and-Spin of the Alibaba stake.
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We have previously spoken at great length on the potential and means for a tax efficient sale of Alibaba and Yahoo Japan. We have revised our Sum of Parts analysis to reflect a 50% probability of a tax efficient sale of the second (post-IPO) Alibaba stake. We are not assuming tax efficiency on the potential sale of Yahoo Japan, which would provide an additional $4 of potential upside to our target price.
Delay of Alibaba IPO beneficial to Yahoo
Several media outlets have reported that Alibaba has delayed its IPO from a reported Spring 2014 event until some time in 2015. We believe a delay in Alibaba’s IPO will raise its IPO valuation, benefiting Yahoo! Inc. (NADAQ:YHOO), which is required to sell 208mn shares of Alibaba concurrent with the IPO.
eCommerce Data should help 4Q13 Alibaba financials
Alibaba reported 87% growth in sales on the important November 11th holiday shopping day, selling $5.8bn of merchandise in one day – more than twice what is sold across all of the U.S. on Black Friday and Cyber Monday combined. As Alibaba’s influence expands, so does its IPO valuation, which we will believe will be $120bn. We are assuming a $200bn valuation for the sale price of the final tranche of Alibaba shares that Yahoo owns.
Yahoo core estimate changes
We have tweaked our 2014 estimates to more accurately reflect the impact of the effective end to Microsoft Corporation (NASDAQ:MSFT)’s RPS payments after 1Q14. We are also introducing 2015 estimates, where we are below consensus for core Yahoo! Inc. (NADAQ:YHOO) but above in expected earnings contribution from Alibaba and Yahoo Japan.