Yahoo!'s Earnings Report Wasn't Just About Yahoo!

NEW YORK ( TheStreet) -- A casual observer may wonder why shares in Internet giant Yahoo! ( YHOO) 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.

As you can see, the market is pricing an incredibly small premium for Yahoo!'s own properties, and it makes Yahoo! a strong buy, in my opinion. In fact, the company is so attractive that recently I spelled out why Apple ( AAPL) should buy Yahoo!.

For investors who already own shares, the latest earnings report continues the justification to stay long. Yahoo!'s CEO Marissa Mayer has been on the job for only a year, and it's clear by her actions that the slow decay into irrelevance has ended.

During the conference call, Mayer pointed out that global traffic is up year over year and monthly mobile users increased 15% from last quarter at 390 million. Still, when your company is the size of an aircraft carrier, it takes time to change course. Mayer is moving the rudder by acquiring companies that help build the Yahoo! brand.

Whether or not Mayer's buying pace is too rapid -- she bought more companies than were purchased in the previous five -- won't be known for some time. Buying a profitable company and being able to merge it into your ecosphere profitably are two very separate things. With that said, some will probably not pan out, but that doesn't mean the totality won't monetize. I think Yahoo! is one of the strongest investments available.

Even at $50, it's still undervalued based on the current zero growth premium priced into the shares.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.