NEW YORK (TheStreet) -- Yahoo! (YHOO) may be one of the most difficult publicly traded companies for an anlyst to assign an accurate valuation. Its market cap is currently about $36 billion, but does that fully reflect its stake in Alibaba?
You wouldn't think so by the way the stock has performed in 2014. For the year to date YHOO, at around $35, is down nearly $11% and down 13.5% from the 52-week high of $41.57.
Yahoo! owns 24% of Alibaba, which will launch its initial public offering in the second half of September. The Web portal will now sell 140 million shares at Alibaba’s market debut, down from an originally planned 208 million. Once Alibaba shares go public I predict the company's market value will quickly soar to between $150 billion and $180 billion.
By the end of September 56% of Yahoo!'s market valuation will be cash, suggesting that its business operations are only worth $16 billion. That seems absurd to me, especially when you look at the company's key financial metrics.
With net operating cash flow of over $357 million in its latest quarter, manageable debt, gross profit margin of 83% and trailing 12-month revenue of more than $4.6 billion, it appears shares of Yahoo! are priced too low.
So if you want to benefit from the impending Alibaba IPO, the best move you can make it to ask for an allotment from your broker-dealer.
Yet, as anyone who has attempted to get IPO shares of a "hot" company knows, your chances are slim to none. So what's the second best way to benefit from the debut of Alibaba?
When all is said and done, my opinion is investors in the U.S. will experience a better Alibaba payday with Yahoo! than with Softbank. Before explaining, take a look at this one-year price chart of YHOO along with two important financial metrics.
The company's quarterly net income and its year-over-year revenue growth raise some red and orange flags. No wonder shares have been stuck in a narrow trading range during the last five months.
What does all this have to do with Yahoo! being the best way to play the Alibaba IPO? As Eric Jackson suggested in a recent article, Yahoo! is a takeover candidate, and the only way its shares will be free to soar is when investors everywhere figure that out.
Whether the acquirer is Softbank, Alibaba or a private investor, Yahoo!'s days are numbered. It also wouldn't surprise me if Apple (AAPL - Get Report) or Microsoft (MSFT - Get Report) suddenly offer to buy Yahoo! before or shortly after the Alibaba IPO.
With its affordable market cap and its potential cash treasure trove, Yahoo! has a surprising upside valuation, which I've calculated to be as high as $48 a share based on all the variable I've mentioned above.
That's why Yahoo!, in the final analysis, is my way to play the Alibaba IPO. Don’t hesitate to take a stake before Wall Street finds out.
At the time of publication, the author held positions in YHOO, AAPL and MSFT although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates YAHOO INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate YAHOO INC (YHOO) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, solid stock price performance, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Although YHOO's debt-to-equity ratio of 0.09 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 2.99, which clearly demonstrates the ability to cover short-term cash needs.
- Net operating cash flow has slightly increased to $357.41 million or 8.03% when compared to the same quarter last year. Despite an increase in cash flow, YAHOO INC's average is still marginally south of the industry average growth rate of 17.69%.
- Compared to its closing price of one year ago, YHOO's share price has jumped by 30.19%, exceeding the performance of the broader market during that same time frame. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- The gross profit margin for YAHOO INC is currently very high, coming in at 83.10%. Regardless of YHOO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, YHOO's net profit margin of 24.87% compares favorably to the industry average.
- You can view the full analysis from the report here: YHOO Ratings Report