April 17 (Bloomberg) -- Investors won’t necessarily abandon Yahoo! Inc. even after the Web portal reduces its stake in Alibaba Group Holding Ltd.
That’s because Yahoo, which owns about 24 percent of Alibaba, will still have a sizable chunk of the Chinese e-commerce company after it goes public as soon as this year. The Web portal is set to sell about 40 percent of its Alibaba stake in the initial public offering, leaving it with the majority of its holding. Yahoo can hang onto that piece indefinitely if it chooses.
Investors who had bought into Yahoo as a proxy for privately held Alibaba thus may not be tempted to dump the Web company’s shares -- at least not right away. For Chief Executive Officer Marissa Mayer, who has relied on Yahoo’s Alibaba stake to boost the company’s share price, that may buy just enough time to accelerate a nascent sales rebound.
“The core turnaround remains uncertain, but we don’t think it will matter much for the stock in the near term” because Alibaba will remain a factor for Yahoo, Ben Schachter, an analyst at Macquarie Securities USA Inc., wrote in a note yesterday. He has the equivalent of a buy rating on the shares.
Sarah Meron, a spokeswoman for Yahoo, declined to comment.
How Yahoo will fare after Alibaba goes public is in the spotlight following the Sunnyvale, California-based company’s first-quarter results earlier this week. The Web portal posted its first revenue growth in more than a year, in a sign that Mayer’s moves to attract advertisers are starting to pay off.
Yet much of Yahoo’s stock gains yesterday were unrelated to its core business, according to analysts. Instead, the company benefited from Alibaba, whose financials were in Yahoo’s earnings report. Alibaba posted a 66 percent sales jump and more than doubled its profit for the last quarter of 2013.
Yahoo shares rose 6.3 percent yesterday to $36.35 at the close in New York.
Youssef Squali, an analyst at Cantor Fitzgerald, raised his target price for Yahoo to $42 from $40 yesterday because of the better Alibaba results. He put the valuation of Yahoo’s core operations at only $6 a share, with Alibaba making up more than half of the Web portal’s market capitalization.
“Prospects for an imminent Alibaba IPO and further buyback should continue to support the stock, in our view,” wrote Squali, who has a buy rating on the shares.
Aside from some valuation support from Alibaba, Yahoo also gets a fresh infusion of cash from selling down its stake. That would result in billions of dollars that could be used for stock buybacks or acquisitions. Yahoo had $4.6 billion in cash and equivalents at the end of the first quarter.
During a call with analysts earlier this week, Mayer said the company would be careful with its cash.
“We intend to be good stewards of our capital and we have been to date,” Mayer said. “When we look at the investments we need to make in the business, you’ll see the same type of mix we’ve been making to date: some strategic acquisitions, some tuck-in acquisitions.”
Yahoo paid $1.1 billion for blogging startup Tumblr Inc. last year and has also acquired a string of smaller companies.
Yahoo may look for Tumblr-sized deals as Internet companies make increasingly big bets, Scott Kessler, a New York-based equity analyst at S&P Capital IQ, said in an interview.
“It would make sense for Yahoo to kind of think -- and perhaps act -- more aggressively,” said Kessler, who has a buy rating on the stock.
The company could pursue acquisitions in mobile, be it ones focused on consumers or devoted to advertising, he said. Yahoo could also seek deals in video, where it’s been investing in more professional content.
That said, Yahoo will need to be cautious with using its cash for any potential deal. The company needs resources as it faces a multiyear effort ahead to turn around its advertising business. First-quarter sales, excluding revenue passed onto partner sites, were $1.09 billion, up from $1.07 billion a year earlier, a gain of less than 2 percent.
“I’m not particularly confident that the turnaround efforts for the core business will be successful,” Jordan Rohan, an analyst at Stifel Nicolaus & Co., said in an interview.
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