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Yahoo! May Be Rewarded for Its Gluttony

NEW YORK ( TheStreet) -- Yahoo! (YHOO - Get Report) reported mixed earnings on Tuesday and lower guidance. This stock will be one to watch today.

In 2008, it was left to rot, attracting flies and short sellers after allowing Microsoft's (MSFT) $31-per-share takeover bid to slip away.

Fast forward five years to July 2013, and Yahoo! is no longer the Beelzebub of Sunnyvale, Calif. Shareholders from L.A. to Ekron are sinfully feasting on the bounty resulting from new 52-week highs. Yahoo! is once again seated at the same table as online lords Google (GOOG), Amazon (AMZN), and Microsoft.

Yahoo!'s sizzling growth continues from a tailwind coming from China. Eight years ago, Yahoo! invested $1 billion in Alibaba. Last year, it sold half of that stake for $7.6 billion. That was the best investment made since $800 could buy 10% of Apple (AAPL).

I examine Alibaba's growth and impact on Yahoo!'s market cap here and here. The CliffsNotes version places Alibaba's value at a minimum of $50 billion, and as high as $130 billion.

That's exciting news for Yahoo!'s shareholders because they own about 20% of Alibaba. Using back-of-the-envelope calculations, if Yahoo! is able to sell its the rest of its shares for $22 billion (there are rumors of an IPO possibly in the works), the market is grossly miscalculating the value of Yahoo! at only $7 billion.

I can't lie and say buying Yahoo! for less than $30 is as appetizing as buying 10% of Apple for $800, but if Yahoo! is really worth $60 and you can buy it for $30, it's time to back up the truck and get heavy. Keep in mind that these numbers are before adjusting for tax implications that are impossibly difficult to calculate for anyone without an office in the C-suite.

A $20 billion payday places Yahoo!'s cash-removed, adjusted forward price-to-earnings ratio at less than 4. In other words, if we remove the cash received from Alibaba's sale and adjust the share price proportionally (for example, assuming it was distributed as a special dividend) the remaining price for Yahoo!'s shares is less than four times earnings.

For investors, buying shares at the current price is the same as taking my sons Brenton, Michael, and William -- or "BMW, as I like to call my entourage -- to McDonald's (MCD) and buying all the dollar menu items they want for 25 cents each. BMW's ravenous chicken nugget capacity could put the Happy Meal maker out of business faster than Ronald McDonald could update his resume.
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