Yahoo!'s Stake in Alibaba IPO: What Wall Street's Saying

NEW YORK (TheStreet) -- Wall Street is aflutter following Alibaba's updated regulatory filing in which the Chinese e-commerce giant said late Friday that it plans to sell shares between $60 and $66 a piece, raising about $21 billion in an initial public offering.

Alibaba plans to sell 123 million shares in the IPO. Its principal shareholders, which include Yahoo! (YHOO) , will also sell shares bringing a total of 320 million shares to the U.S. market. Alibaba's shares will be listed under "BABA" on the New York Stock Exchange.

Yahoo!, which owns just about a quarter of Alibaba shares, plans to reportedly sell 121.7 million shares (23% of their own holdings), which would yield it about $8 billion in proceeds. Following the IPO, Yahoo!'s stake in Alibaba would come to about 16.3%, according to Bloomberg, citing the filing.

Shares of Yahoo! rose 2.9% to $40.74 on Monday. Here's what analysts are saying about Yahoo! on Monday.

Carlos Kirjner, Bernstein Research (Outperform; $40 PT)

Alibaba has set the initial price range of its IPO between $60 and $66 and disclosed that Yahoo! will be selling 121M shares in the IPO. These are both slightly better for Yahoo! and its shareholders than what we had expected and offset the slightly worse than expected dilution of the Alibaba stake. We think Yahoo! will trade up in the next few days and possibly weeks because of the IPO and we maintain our outperform rating. That said, material upside from here is increasingly dependent on Yahoo! shareholders' ability to realize value in a tax efficient way from the 16% stake in the Alibaba Group remaining after the IPO.

Yahoo! should end up with ~$8.8B in gross proceeds from selling 140M shares out of its 523.6M share ownership stake, which should yield ~$5.7B in net proceeds (mid-point) at an assumed 35% fully-taxed rate (or $5.65/sh.). Last quarter, management indicated that the first tranche would be "fully taxed" and they committed to returning "at least half" of the after-tax IPO proceeds to shareholders. 35% cash tax rate was the rate applied for the Sept '12 Alibaba share sales. However, assuming only U.S.-held shares are taxed at 35% (23.2% overall effective rate), net proceeds could reach $6.8B (midpoint), or $6.68/sh.

YHOO's second tranche should benefit from greater tax efficiency/higher valuation. Yahoo! should still hold 383.6M shares post IPO, all of which we assume will be held in Hong Kong, where capital gains are tax-free. There is a one-year lock-up on these shares. Increased tax efficiency on the second tranche and a higher valuation over time could provide as much as $10/sh of upside to our $39 PT, by our estimate.

Jason Helfstein, Oppenheimer (Outperform; $43 PT)

On Friday, Alibaba updated its filing with an initial IPO pricing range of $60-$66 per ADS, valuing the company between $148B and $163B, or 23x our 2015E net income at the pricing midpoint. As this is roughly in line with the $168B IPO valuation in our prior analysis, we are maintaining our $43 price target. While this suggests only 7% upside, we believe investors should wait to see if the IPO prices above the initial range. Applying a peer multiple of 30x, compared to Tencent (30x), BIDU (28x) and DANG (29x), BABA shares could trade at $200B.

Assuming 15% "payments" to Alibaba and Softbank to effect tax-free spins, this suggests a "bull-case" valuation of $54 per share. However, as long as YHOO [management] has access to cash, we believe investors will significantly discount this in the share price.

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 multiple 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 17.66%.
  • Compared to its closing price of one year ago, YHOO's share price has jumped by 39.61%, 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.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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