What's Yahoo! Really Worth Once Alibaba Is Gone?

NEW YORK (TheStreet) -- There was a great article by Doug MacMillan last week in the Wall Street Journal about how Yahoo! (YHOO) is going to be under increasing pressure after Alibaba goes public later this year.

In the article, there's an interesting graphic that basically outlines of what Yahoo!'s current $34 billion market cap consists. The valuation is important in how the market views the worth of Yahoo!'s core business, which will have an effect on its stock price.

The Journal does an accurate job of categorizing the value of the Alibaba and Yahoo! Japan stakes net of taxes, which Yahoo! would have to pay. This is something that several other articles -- stating the Yahoo! core business currently has a negative value -- have omitted.

According to the article, Yahoo!'s Alibaba stake is worth $22.42 billion, using a $160 billion valuation for Alibaba. Yahoo!'s 35% stake in Yahoo! Japan is worth $5.4 billion net of taxes.

The article then says Yahoo! has $1.71 billion in cash on hand, and so the Yahoo! core business has an implied value of $4.7 billion.

However, I would dispute the Journal's conclusion that Yahoo! has $1.7 billion in net cash on hand. On the last earnings call, Yahoo! reported it had $4.571 billion in "cash and marketable securities." The reason for the discrepancy between Yahoo! and the Journal article is contained in the company's 10-Q.

Yahoo! did report $2.9 billion in "cash and cash equivalents" as well as "short-term marketable securities." It also reported $1.2 billion in convertible notes or debt. Therefore, the net cash reported was $1.71 billion, as the newspaper says. However, Yahoo! also reported $1.631 billion in "long-term marketable securities," which could be 10-year bonds or bonds maturing in 90 days.

Clearly, Yahoo! believes it is quickly and easily monetizeable. The Wall Street Journal is being overly strict, in my view, in not including this additional amount as part of Yahoo!'s net cash.

Coincidentally, NYU Valuation Program Professor Aswath Damodaran published this piece over the weekend in which he agrees the net cash position of Yahoo! is $2.4 billion.

Why does this matter? Because it implies the market believes Yahoo!'s core business is only worth $3 billion, which is roughly the same valuation the market currently is putting on AOL (AOL). This is odd as Yahoo! has triple the annual earnings before interest, taxes, depreciation and amortization of AOL -- $1.5 billion vs. $434 million.

This suggests the market is valuing Yahoo!'s core business's enterprise value as being worth 2x its Ebitda. That's surprisingly low.

AOL currently trades at an enterprise value to Ebitda level of 7x. The industry average for a software company is closer to 12x.

The market is currently valuing IAC/InterActiveCorp (IACI) at about double the value of Yahoo! core even though Yahoo! has more revenues and again about 3x the Ebitda annually.

When the Alibaba IPO happens and Yahoo! has to stand on its own two feet, a lot of talking heads seem to think Yahoo!'s stock will drop. It might turn out that, when forced to look at the true facts, investors will conclude Yahoo! core is trading too cheaply and needs to be revalued upwards.

At the time of publication the author was long YHOO.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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