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Summary:

Maybe one of the smarter moves of the Terry Semel era was for Yahoo to give up on its China operations, settling instead for a substantial chunk of a native startup, Alibaba. That decision has powered Yahoo’s stock to a level that was barely imaginable a […]

Maybe one of the smarter moves of the Terry Semel era was for Yahoo to give up on its China operations, settling instead for a substantial chunk of a native startup, Alibaba. That decision has powered Yahoo’s stock to a level that was barely imaginable a month ago – and it may send it even higher.

Yahoo’s shares suddenly surged Friday afternoon to its highest level in 20 months on news that everyone has known for some time: It own’s a 40% stake in Chinese e-commerce giant Alibaba, and Alibaba is going public in Hong Kong with a valuation of at least $8.8 billion.

Back in August 2005, Yahoo paid $1 billion in cash for the stake and threw in its own Yahoo China operations, which were then reportedly valued at $700 million. About a year later, then-CFO and current President Sue Decker valued the Alibaba investment at $1.4 billion. Today, a 39 percent stake in a company valued at $8.8 billion is worth $3.4 billion, or a 150 percent return in one year.

So what set Yahoo on fire right before the end of trading last week? Someone ran the numbers and estimated how much an Alibaba IPO would add to Yahoo’s stock. The answer, as reckoned by American Technology analyst Rob Sanderson, is an increase of $2.50 per Yahoo share.

That’s not all. Sanderson figures the Alibaba stake is worth about $6 a share to Yahoo, and it could rise to $13 or $15 a share in a few years. He said Alibaba properties Taobao, which has out-eBayed eBay in China, and AliPay, a PayPal-like service, are where eBay and PayPal were several years ago.

Yahoo’s stock rose $2.29 at $33.63 in Friday trading and is up another 40 cents at $34.02 in aftermarket trading as of Sunday night. Sanderson’s target for the stock is even higher: $41 a share. Less than a month ago, Yahoo was trading as low as $22.27, an it’s already risen 53% in that short time.

A week ago, Alibaba raised its offering price from a range between $10 and $12 a share to a range between $12 and $13.50 a share. According to Reuters, the offering was well oversubscribed, attracting $180 billion in orders from institutional investors. Throw in retail demand and the stock was oversubscribed 180 times over. Given that demand, the stock is quite likely to surge once it starts trading, even if the offering price is raised yet again.

So a move made two years ago under Semel is now helping Yahoo after he’s gone. But don’t give Semel too much credit. After all, it was clear at the time that the deal’s key broker was Jerry Yang, who has since succeeded Semel as CEO. Now Yang has arranged for Yahoo to buy 10 percent of the shares that Alibaba is selling in the offering.

Update: That didn’t last long. Yahoo’s stock is now trading back down at $31.77, lower than at any point on Friday. There are believers still jumping on the Alibaba bandwagon. Justin Post at Merrill issued a note echoing Sanderson’s thinking only with at $36 target, and a Seeking Alpha contributor sees the stock at $50. Bears may be thinking other uncertainties outweigh any China-driven gains, so we’ll see.

By Kevin Kelleher

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  1. China Syndrome indeed!
    For perspective from the ground level in China, before we all get carried away with just the mere numbers, it is important to note that at the same time Yahoo makes part of its revenues in China via music piracy. And they couldn’t even do that properly as they’ve been found guilty as hell by a Chinese court.
    If credit is to be accorded to Jerry Yang for brokering the China deal – and as Yahoo is obviously benefiting from it financially – he is also complicit in benefiting from music piracy on the side also.
    Sadly, this seems to be how the business model works: US investment money funds a lot of the piracy in China, US investors make a killing, and then the US government goes after China in the WTO kangaroo court.
    And since Yahoo Music’s Ian Rogers has already laid out his expected moral standards in his famous blog piece, it is time for him examine his own house a little more and clear some of the existing duplicity
    [Before anyone cleverly points out that the Alibaba IPO does not include the Yahoo China part, it was still the same deal that brought Yahoo in in the first place]

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  2. bingo this would make google thinking – bidau and Alibaba are the two stocks to watch in the near future.

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  3. Do you know that Alibaba (and Yahoo!, by extension) have an ugly blemish? Alibaba is the world`s largest online shark fin trader. Click this link, and read carefully:

    http://www.celsias.com/2007/10/28/alibaba-com-and-yahoo-back-shark-fin-traders/#comments

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  4. Good to see someone put the numbers out. One more would help and that’s Yahoo’s market cap of $45 billion. If Yahoo’s $1 billion investment doubles or triples I don’t see how that’s worth more than a few bucks a share.

    Shark fins? Music piracy? Get a grip guys. . .

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  5. I wish to warn as many people as possible of the risk of dealing with companies listed on Alibaba.com.
    Alibaba cannot be trusted, they list bogus companies who offer goods at very low prices, accept payment via TT and do not send the goods. Alibaba is no better than these companies as it makes money from their dishonest activities and lists many of them as Gold Suppliers implying that they are honest traders.
    Alibaba will not help people who have been robbed in the recovery of their money and will not take any responsibility for the loss.
    Please avoid Alibaba and the companies they list. I am speaking from experience; I lost a large sum of money dealing with a Gold Supplier who proved to be a fraud.

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