Yahoo's China Syndrome: Alibaba IPO Lifts YHOO

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.

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