Alibab

YAHOO! A MODERN DAY

TALE OF ALIBABA

Summary

Net of its stakes in Alibaba, Yahoo Japan, and its cash, Yahoo's core business is being valued at less than 2x operating cash flow.

CEO Marissa Mayer and CFO Ken Goldman have made material investments to turn Yahoo around, and they are beginning to pay off.

Once Alibaba becomes public, investor focus will likely shift to Yahoo's core business, which is set to improve further in 2014.

For most investors, the days when shares of Yahoo (NASDAQ:YHOO) (here after referred to as Yahoo for stylistic purposes) were valued on the basis of the company's underlying search and advertising business have long since passed. Many investors now see Yahoo exclusively as a trading vehicle through which to invest in Alibaba, China's largest e-commerce company, ahead of its IPO, which is set to occur this year. We have already discussed the appeal of Alibaba in a previous article of SoftBank (OTCPK:SFTBY), which owns almost 37% of the company, (versus Yahoo's 24% stake), arguing that when the true value of its equity stakes are added to its mobile operations, the company's intrinsic value per share is considerably higher than its current share price. Our analysis of SoftBank led us to begin considering the question of whether or not the same can be said of Yahoo. Is there value left in shares of Yahoo, given their more than 50% rally over the past 12 months, a rally that has outpaced the NASDAQ, Google (NASDAQ:GOOG), AOL (NYSE:AOL), and Microsoft (NASDAQ:MSFT), trailing only IAC/InterActiveCorp (NASDAQ:IACI)? On top of this rally, Yahoo, unlike SoftBank, has a core business that continued to stagnate in 2013.

We began examining the various pieces that comprise Yahoo's valuation, and what we found leads us to believe that at present levels, shares of Yahoo remain a compelling long-term investment, due not only to its stakes in Alibaba (as well as Yahoo Japan), but also its underlying search and advertising business. Most investors...