Alibaba IPO to Hurt Yahoo

Morningstar analysts are concerned about potential liquidity issues of Alibaba Group for Yahoo shareholders and the lack of opportunities for the firm to invest

Rick Summer, CFA, CPA 19 September, 2014 | 11:31AM

We have erred on the side of caution in the past with respect to Yahoo's ability to realize value from its holding in Alibaba Group, which is set to price on the evening of September 18. We believe Yahoo (YHOO) has primarily been a vehicle for investors to participate in the potential upside in Alibaba Group, but we have historically provided a margin of safety to account for valuation risk, the uncertainty of the timing of an IPO, and the potential for return of capital to Yahoo shareholders.

Based on the pending IPO and our published fair value estimate for Alibaba Group of $90 per share, we are revising our fair value estimate for Yahoo to $42 from $39. We still do not see a compelling reason to recommend the shares of the narrow-moat firm, particularly based on our belief that Yahoo is disadvantaged versus the richer advertising platforms of Facebook (FB) and Twitter (TWTR). 

Our largest concern with respect to the potential liquidity of Alibaba Group for Yahoo shareholders is the lack of opportunities for the firm to invest in high return projects. Presently, Yahoo is set to sell nearly 122 million shares in the offering, and retain a 16.3% ownership interest in Alibaba Group.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Altaba Inc  
Facebook Inc A154.18 USD-2.53
Twitter Inc23.09 USD0.30

About Author

Rick Summer, CFA, CPA  Rick Summer, CFA, CPA, is a senior stock analyst with Morningstar.

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