Everyone who knows anything about Yahoo knows the company is doing well mainly because it owns a big chunk of another company, Alibaba. The Chinese internet giant is expected to go public by the end of the year. The word is, it'll be valued anywhere between $100 billion and $150 billion dollars. And Yahoo owns 24 percent of Alibaba.
Yahoo! released earnings Tuesday. Sameet Sinha, an analyst at B. Riley, says Alibaba is the reason Yahoo’s stock has doubled since CEO Marrissa Mayer took over two years ago.
"Investors obviously clamour for the stock of hot private companies before they go public. So right now, Yahoo is a way for them to own Alibaba stock," Sinha said.
Brett Harris, an analyst at Gabelli and company, says: "So let’s just start with what we know, we know they have $4 billion dollars in cash, so we can take that out of the $34 billion we’re starting with," Harris said.
The $34 billion is what Yahoo is worth. After the cash, subtract another $9 billion for Yahoo’s stake in Yahoo Japan. That brings us to $21 billion, which is the value of Yahoo’s share in Alibaba. That's assuming its values at $150 billion dollars when it goes public.
"So, we’re getting the U.S. business for free. Essentially, the stock is giving no valuation to the U.S. business," he said.
Harris says while Yahoo’s core business is in decline, the company still generates about $1.5 billion in cash a year.
Colin Gillis is an analyst at BGC and he says, when Alibaba goes public, Yahoo will have to sell 10 percent of its share.
"So this is the question you have this tremendous chunk of cash. This is your chance to fix the business if you can use it effectively and wisely," Gillis said.
He said the pressure for Marissa Mayer to fix Yahoo will be greater than ever. The company has barely moved the needle on revenues. Gillis said once Alibaba goes public, pressure on Meyer to manage a turnaround will be even greater than ever.