Yahoo – Happy mathematics

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Yahoo looking attractive for the first time in a long while.

• The process of carving up Yahoo and handing out the pieces is well underway and even with a negative view on Alibaba, Yahoo shares look attractive.
• The pieces under consideration are:
  • Core business. It is thought that Verizon is the lead contender and that it has bid $3bn for the business.
  • This is far below what Yahoo would have hoped but with EBIT declining precipitously this year, there is no argument for a high multiple that will hold water.
  • It looks like Yahoo is also putting its portfolio of 3,000 patents up for sale and is hoping to get around $1bn for them.
  • 4 years ago, this would have been possible but I think that the value of patents has fallen precipitously since 2012.
  • I have long believed that a patent is worth either the present value of the licence revenue it generates or what someone is willing to pay for it.
  • Anything else is pure speculation.
  • In the last 4 years it has become much more expensive and more difficult to successfully assert patents and the power of standard essential patents has been hugely undermined by the intervention of The White House on trade bans.
  • This plus the fact that some of these patents are nearly 20 years old (almost expired) would lead me to value this patent portfolio at $500m in the best instance.
  • Yahoo owns 383.6m shares of Alibaba giving this investment a current value of $29.8bn or $77.1 per ADR.
  • However, Alibaba is one of the most expensive of the emerging market ecosystems and I think its growth expectations look to be the most exposed to a slowdown in China.
  • This combined with substantial shortcomings in corporate governance would lead me to more comfortable with a valuation of $60 per share valuing Yahoo’s investment at $23bn.
  • Yahoo Japan. Yahoo owns 35.5% of Yahoo Japan which gives a value of $9.8bn with which I am comfortable.
  • Yahoo has net cash and short-term investments of $4.8bn on the balance sheet and I am assuming that this is not included in the sale of the core business.
• If I use the bearish valuation for Alibaba and add these assets up, I arrive at a total of $41.1bn or $43.3 per share some 18% above current levels.
• I have made a lot of assumptions here but if I use the market valuation of Alibaba, rather than my bear case, I can add another 16% to the valuation of Yahoo’s shares giving a total of $50.5 per share.
• With Yahoo’s shares at $36.7, there is a lot of wiggle room in the assumptions before one would start losing money, and consequently, the shares of Yahoo look attractive for the first time in a long while.