I get the Yahoo Inc. ($YHOO) Sum Of The Parts (SOTP) story, I really do. I have shared it, acted and profited from it, I just believe its time has come. I am by no means a Yahoo hater. (I’m a Yahoo Finance Contributor now, so how could I be?! )
Having said that, we all know that Yahoo’s core business is nothing like Alibaba, it is not even like Yahoo Japan. The epic rise in its stock has all (plus some) to do with their Asian assets.
I wrote this post a few months ago, on how it is crucial to know why investors are doing what they are doing. Keep this in mind as exposure to Alibaba can be had (later this week) without owning Yahoo.
It’s pretty obvious that Yahoo has been trading like an Alibaba proxy over these last couple of years. It has been the case ever since they sold their first stake in Alibaba back in 2012. If most of the investors in Yahoo only invested into it because they wanted exposure to Alibaba, which based on recent reports there seems to be plenty of investors desperate for some exposure, why would they own it come this time next week?
Michael Santoli wrote this great piece on “proxy stocks” late last week. While he highlighted many different examples of these proxy stocks over the years, in my previous post I compared Yahoo to GSV Capital ($GSVC) and GSV’s run-up to both the Facebook ($FB) and Twitter ($TWTR) IPOs.
There are obvious reasons of why I think the GSV comparison is best. Not least of which is that Facebook (& Twitter) are decent comps for Alibaba. We are also talking about stocks that have gone public in the same (liquidity driven) bull market. (Facebook’s IPO was in 2012 and Twitter went public last year.)
One of the major differences – and this does not bode well for Yahoo investors – is that as a percentage of their entire Net Asset Value (NAV), Yahoo’s current stake in Alibaba is even larger than GSV’s stake in Twitter. Yahoo’s stake in Alibaba more closely resembles the GSV’s Facebook stake pre Facebook’s IPO, and as you can clearly see from the chart below, the larger the stake the more people held it for the proxy and this resulted in a much larger drop when the proxy wasn’t needed.
I think it is important to realize that most of the time, there is a “holding company discount” with these types of companies. Leading up to a liquidity event, especially in a hyped sought after name, that discount not only shrinks, but there could be so much demand for the stock that it drives the stock to a premium to its parts.
When the event occurs however, just like the stock overshoots on the upside, it can overshoot on the downside as well. GSV not only saw selling pressure as both Facebook and Twitter went public, it continued falling well below its NAV in both cases in the following months. The fall in absolute value is even more impressive when considering that Twitter did extremely well at/after their IPO.
Back in early-mid 2013, my twitter followers may recall that I became quite bullish on GSV. The stock fell to sixty cents on the dollar in the aftermath of the Facebook IPO, and many of our clients benefited from that irrational sell-off and the subsequent hype buildup leading up to the Twitter IPO. I think there might be a similar opportunity with Yahoo in the not too distant future.
Yahoo core is undoubtedly worth more than zero. They make real money and have many attractive assets. However, supply and demand will move the stock in the short term, and I can’t see how it wont fall at or very soon after the Alibaba IPO. My main question, is how far will it fall? Will value investors scoop it up at a price that their core business will equal zero, or will it take a GSV-like dive and become significantly undervalued until another catalyst emerges?
The beginning of this week might very well see one more push higher in shares of Yahoo, but I truly believe this will be one of those cases where many will say “it was so obvious” after the stock pulls back. Saying it after the fact won’t really help any current investors, I hope this post will!