Wall Street keeps looking for a reason to get behind Yahoo! ( YHOO), but it can be hard to stay there for long. Shares of the Internet giant slipped 3% Tuesday to $30.83, following a sharp selloff of more than 7% Monday. But this week's tumble follows a run-up of roughly 16% the week before. Those gains were driven by investors getting carried away by the potential for Yahoo!'s 39% stake in Chinese Internet commerce company Alibaba.com, which made its debut on the Hong Kong stock exchange this week and will begin trading on Nov. 6. Still, the recent volatility merely signifies the latest in a series of the silver bullets that Wall Street is looking for when it comes to Yahoo! shares. There have been several similar gains and pullbacks this year because of speculation ahead of the launch of the company's Panama ad-ranking system, rumors that the company would be taken over by Microsoft ( MSFT), and the mulling over of easy-fix ideas like breaking the company into pieces or outsourcing search to Google ( GOOG) to save a quick buck. This latest whipsaw shows yet again that there are no quick fixes for Yahoo!. CEO Jerry Yang is undertaking a
massive overhaul of the company , and should be commended for his bold vision. But it's still too early to tell whether the company will be able to turn around its flailing business. And, in the meantime, investors should take talks of quick fixes with a grain of salt as the plan unfolds.
Investor enthusiasm surrounding the company's Alibaba stake, which Yahoo! bought for $1 billion in 2005, seems overly optimistic. "We believe investors had been assuming significant upside on the Alibaba deal; therefore the stock has been up 16% over the past week (compared to the S&P 500, which has been up 2.3%)," Thomas Weisel analyst Christa Quarles wrote in a research note on Monday. Thomas Weisel makes a market in Yahoo! shares. Quarles estimates that Alibaba would add about $1 a share to Yahoo!'s value. But other analysts have speculated that it could be worth far more. American Technology Research analyst Rob Sanderson wrote last week that Alibaba could add between $13 to $15 a share to Yahoo!'s value within four years. That led Sanderson to raise his valuation of the Alibaba stake to $6 a share from $2 a share, and contributed in part to his boosting his price target on Yahoo! to $41. "We believe the Alibaba.com IPO will shine a light on hidden value in Yahoo!'s Chinese investments," Sanderson wrote. Sanderson cites bullish prospects for the Chinese Internet sector in valuing Alibaba so richly. But in looking so far ahead, investors should also be aware that the value of Alibaba could well go below current levels just as easily as it could go up. That's because Chinese Internet stocks are currently trading at record highs, following a big bull run this year.
Chinese search juggernaut Baidu.com ( BIDU) has tripled in value just this year, while other notable names like Sina ( SINA) and Sohu ( SOHU) have each doubled. The Alibaba IPO may well be timed as a shrewd move to capitalize on the bull market in China Internet stocks. But there's also a growing chorus of voices arguing that the China Internet market may be near its peak. If that view is proven correct, then Alibaba could be worth far less down the road as well. With the uncertainty of an Alibaba windfall, investors should continue to be looking at Yahoo!'s stock relative to its valuation and future growth prospects. Shares trade at about 58 times forward earnings, and the company has a price-to-earnings-to-growth ratio of a staggering 3. Google, by contrast, trades at 34 times forward earnings and has a PEG ratio of 1.26. And while Yahoo! beat lowered expectations for the third quarter, its difficult to justify that kind of premium. The company's core display business did reaccelerate during the quarter after five quarters of deceleration, but given that Google and Microsoft are intent on storming the field through their acquisitions of DoubleClick and aQuantive, respectively, it's too early to tell if Yahoo!'s business will continue to pick up. Whether Yahoo! can deliver on its main business -- not a fortuitous gain from a hot IPO -- is where investors should ultimately focus.