NEW YORK (
was taken to the woodshed Tuesday morning following the overnight fear of a nuclear meltdown in Japan.
The stock touched $16.04 in early trade Tuesday after closing at $17.67 last Wednesday. The stock is being smacked down because of its ties to Yahoo! Japan. It's a major over-reaction.
Yahoo! has made it clear since its earnings call in January that it is exploring how to most tax-efficiently monetize its stake in Yahoo! Japan. Investors in the company have been calling for this for some time.
CFO Tim Morse reiterated a few weeks later to a
conference that Yahoo! was working closely with Yahoo! Japan owner Softbank on the best solution for doing this.
It appeared, based on the price action in the stock last week, that a deal between Softbank and Yahoo! was imminent, giving Yahoo!'s stock a major boost. However, the Japanese earthquake and aftermath have smacked down the stock.
Yahoo! Japan's stock was down 17% from last Wednesday to Tuesday. The biggest part of the drop came on Tuesday alone. Yahoo! Japan (ticker 4689 in Tokyo or YAHOY on the pink sheets in the US) ended Tuesday down 8.3% -- but, at the height of the panic, after the Nikkei re-opened after lunch, Yahoo! Japan was down more than 15% like the overall market over there. It rallied in the afternoon session.
There is no reason for Yahoo!'S early drop Tuesday - more than 7%, significantly more than the U.S. market -- other than following Yahoo! Japan in sympathy. That was much more severe of a drop compared to
One media outlet on Tuesday speculated if the large drop meant that someone knows that a deal with Yahoo! Japan is not going to happen or that a deal is much more complicated than first thought.
Everyone needs to take a pause.
Yahoo! Japan's exposure to a Japanese GDP slowdown is likely much less than other consumer discretionary names -- especially at the high-end (like
-- yet it has been dumped in the same way as every other Japanese manufacturer.
That seems bound to be corrected soon -- very likely with the overall Japanese market (more popularly traded through the
iShares MSCI Japan ETF
, which started to improve on U.S. markets trading on Tuesday).
It is highly unlikely that Yahoo!'s stock move on Tuesday had anything to do with ongoing discussions with Softbank about their stake in Yahoo! Japan, given the timing and the moves compared to the nuclear reactor situation.
Therefore, it's likely that the ongoing dialog is exactly in the same spot that it was last week, when Yahoo!'s stock was perking up.
, Yahoo! is at a major discount at the moment because of its under-valued stake in the Chinese private companies Taobao and Alipay, which Yahoo! owns through its 40% stake in the parent company Alibaba Group.
A Yahoo! analyst, James Lee of CLSA, said recently that he thinks Yahoo!'s Alibaba stake, along with its stake in Yahoo! Japan are worth nearly $13 per share. I think that's low. Even at the currently discounted Yahoo! Japan price, Yahoo!'s 35% stake is worth $5.64 per share of $7.39 billion.
Yahoo! also currently has $2.96 per share of cash and deferred revenue as of the end of December.
Those valuations are unquestionable. Where it gets difficult is in assessing the private valuation of Alibaba Group.
James Lee obviously believes that the value to Yahoo! -- after taking a liquidity and tax discount -- is only $4.40 per share or just under $6 billion. This suggests he thinks Yahoo!'s stake before discounts is almost $10 billion, meaning he thinks Alibaba overall is worth $24 billion.
My estimate of the Alibaba Group is that it would likely be valued at $50 billion today, if Taobao and Alipay were to hold IPOs -- potentially much more than that. Taobao looks like it can do $5 billion in revenues next year. Alipay is probably set to do half that, based on the research that we have done over there.
A 10 times forward multiple on 2012 revenue is not unreasonable, given the current prices of
-- even after the recent macro uncertainty.
Therefore, even discounting the entire Alipay stake -- which many Yahoo! analysts do and which is the equivalent of discounting the PayPal stake within
-- you can easily get to $50 billion valuation for Alibaba Group.
So, even after a 40% haircut on a conservative estimate, I get to Yahoo!'s stake in Alibaba Group being worth $13.74 per share, not $4.40 as per Lee.
Add them up and I have Yahoo! being worth $22.34 per share -- assuming that its core, wholly-owned business, which Carol Bartz and Tim Morse spend 98% of their earnings calls discussing, is worth zero. That too is unreasonable in my view.
The bottom line is that Yahoo! sell-off is emotional and over-done. Its miniscule current valuation will become apparent. Investors want to see that Japan's economy continues and China's torrid growth continues. We should get some clarity on this by the end of the week.
Then Yahoo! investors will turn their attention back to a deal for Yahoo! Japan and speculating on the possibility of an Alipay and Taobao IPO in the next year.
Eric Jackson held a long position in YHOO and AAPL at the time of publication.
At the time of publication, Jackson was long Yahoo! and Apple.
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson