Friday, February 11, 2011


YHOO is a dysfunctional company led by dysfunctional management, thus leaving it quite vulnerable to takeover or some sort of significant corporate transaction.

Valuable assets

It's certainly been a tumultuous couple of years for Carol Bartz as the leader of Yahoo!. It is a company that Bartz herself has had difficulty understanding, let alone explaining to investors. Recently, she was asked to do just that, to which she replied, "Maybe it's taken me two years, but I've got it: content, communications, media, and innovation. I think Yahoo! has always stood for those words. It went off track a bit when people thought it was a search company."

While Bartz may not grasp exactly what the company's focus should be, she does acknowledge that it should be geared more toward Facebook than GOOG. With Yahoo!'s search business now in the hands of MSFT, it can now focus on some of its high value and social assets.

Yahoo! is actually the leader by a wide margin in a social network that has been around long before Facebook. Yahoo!'s fantasy sports games bring more than 30 million unique users to the site monthly, and not just any users: The majority are from the highly coveted age 25-49 male demographic. This had made Yahoo! Sports the most visited sports site on the Internet, commanding 20% of all time spent surfing online sports properties.

The company's continuous improvement of Yahoo! Sports is a stark contrast to what many believe are the company's two crown jewels: Yahoo! Finance and Flickr. While both sites are widely used, Yahoo! hasn't really added any value to either for years. Yahoo! Finance had 17 times as much traffic as Google's comparable finance site in 2009, but as Google continues to upgrade its content, Yahoo's has been close to stagnant for years.

Since being acquired in 2005, Flickr, which was once the largest photo sharing site on the Internet, was quickly overtaken by Facebook. While many are satisfied that Yahoo! didn't destroy the site, the company has certainly not added much value. These assets do remain valuable, but similar to the company as a whole just need some direction.

The real value

While I do think that the value in these assets will be unlocked at some point, it is not what excites me about the stock in the coming year. What does excite me are the initial public offerings of Chinese companies DANG and YOKU that show how undervalued Yahoo! is.

Both companies recently completed IPOs in the U.S. and have already achieved values in the billions in market capitalization. Yoku is China's equivalent to YouTube, while Dangdang is an Internet retailer similar to AMZN. DANG is a much smaller competitor of China's largest e-commerce company and the EBAY of China called Tabao. More importantly, Yahoo! owns 40% of Taobao's parent company, Alibaba. Many analysts had valued Yahoo's stake in Alibaba around $11 billion, but if these recent IPOs are any indication, those estimates woefully underestimate the price the market is willing to pay for a similar IPO or spin-off of Alibaba's top online shopping site, Taobao, which has more traffic and sells more merchandise than Amazon.

Yoku's stock price increased by 161% on the first day it traded on the NYSE, and it is still not even a profitable company -- but let's look at Taobao to DANG because they are more easily comparable.

Dangdang's first year of profitability was 2009, in which it produced revenue of $218 million and profit of $2.5 million. Analysts estimate that Taobao earned a similar amount through advertising fees and enhanced product listing fees that it charges consumers. However, the profitability from these transactions is many times higher than what Dangdang earns from its total revenue.

In addition, through September of 2010, Dangdang has reported that its site has had 1.61 million daily unique visitors compared with Taobao, which has reported more than 50 million daily unique visitors through October. This helps explain why analysts believe Taobao accounts for 75% of China's rapidly growing online commerce market, while Dangdang's site accounted for less than 1%.

Even Yahoo! can't screw this up

So a barely profitable Dangdang, which some call an also-ran, trades at more than 300 times EBITDA. If we apply a similar evaluation to Taobao -- the rapidly growing leader in the fastest-growing Internet market in the world, in which only about a third of the population is online today -- you begin to see just how much this company might be worth.

This doesn't even take into account Alibaba's other properties such as Alipay, which is China's equivalent to eBay's crown jewel, Paypal. Alipay recently overtook its U.S. counterpart as the largest online third-party payment platform in the world. Alibaba's other properties include the Craigslist of China, Koubei, and publicly traded, which is the leader in e-commerce for Chinese exporters. The best part of all is that Yahoo! can't screw up a company it doesn't run, at least on its own.

With that being said, it is hard for me to come up with a valuation that doesn't have the total value of Yahoo!'s Alibaba stake worth more than the company's entire $22 billion market capitalization.

I won't attempt to argue that Bartz can lead a Yahoo! turnaround, or that the company is on the verge of tremendous growth. However, I do believe that the company is woefully undervalued and under pressure to unlock some of this value soon. In addition to some of its core assets I discussed and the ownership in Alibaba, Yahoo! also has a 34.5% stake in Yahoo! Japan believed to be worth at least $7 billion, as well as an additional $2.8 billion, or $2.16 per share, of cash on its balance sheet.

Even without a Taobao IPO, if Yahoo! were to sell some of its foreign assets and raise a significant amount of cash, the idea of Bartz taking the company private isn't out of the realm of possibility. Many commentators also believe that Microsoft might be looking to make another offer for YHOO. Maybe even EBAY as well, as the company looks to boost its e-commerce marketplace.

long YHOO

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