NEW YORK ( TheStreet) -- A casual observer may wonder why shares in Internet giant Yahoo! (YHOO - Get Report) are higher after the latest tepid earnings report, which included lower forward guidance. The company reported a 13% drop in the bottom line profit on 1% less revenue than the comparable quarter last year, excluding one-time items.
The real news on Tuesday had nothing to do with earnings, not at least from the Web site.
You may not know it, but Yahoo! is more of an investment holding company than it is an online Web portal and email service. The largest online retailer by product sales revenue isn't Amazon (AMZN) or eBay (EBAY), it's Alibaba. Alibaba is so colossal that its sales volume is greater than Amazon and eBay combined.
Alibaba's success is vitally important to Yahoo! investors because Yahoo! has a 24% stake in the company. Alibaba is expected to offer an estimated $15 billion initial public offering next year. At $15 billion, it's a relatively small proportion of a company that will have immense demand by investors and may push the valuation of Alibaba above $120 billion.Using simple back-of-the-envelope math, a 24% share of a $120 billion company comes to $28.8 billion out of the total $34 billion in total market cap. In other words, after adjusting for cash and other investments, Yahoo! is an investment holding company that happens to have a Web site on the side. Within Yahoo! earnings, it reports delayed key metrics of Alibaba and the numbers continue to look great. Alibaba's revenue for the second quarter is up 61% to $1.74 billion, catapulting net income 159% to $707 million. Yahoo! announced it will sell up to 208 million shares of Alibaba during the IPO process. That's down from the previous 261 million shares. Investors responded by pushing the price of Yahoo! higher. Yahoo! owns about 523 million shares.