Tuesday, October 14, 2014

Is Yahoo worthless?

I missed this story earlier when Alibaba went public, but as we're talking about stock valuation, it is timely to talk about why Yahoo's US operations is basically worthless.  Another article is here
The math is pretty simple (numbers as of 10/14/2014):

YHOO owns 16% of BABA.  So YHOO's share of BABA is 0.16*209Bn = $33.44Bn
YHOO also owns 35% of Yahoo Japan (YAHOY) Mkt Cap = $20Bn.  
So YHOO's share of YAHOY is 0.35*20 = $7Bn.

So YHOO's non-BABA, non-Japan operations are worth:  38 - 33.44 - 7 = $-2.44Bn

What does this mean?
There are two ways of looking at this.   One is to say that YHOO is worthless.  This is perhaps a little surprising given that the company is profitable.  

Another way of looking at this is to assume that BABA is overpriced and YHOO is underpriced.  In which case a rational trader would try to short BABA and go long YHOO.  

This latter option isn't as crazy as it may seem.  In fact, it occurred famously with 3COM and Palm.