Yahoo (NASDAQ:YHOO), which made a strategic investment of $1 billion in Alibaba group in 2005 for a 40% stake in the company, [1] has seen its investment grow over the years. Yahoo competes with Google (NASDAQ:GOOG), AOL (NYSE:AOL) and Microsoft (NASDAQ:MSFT) in the display advertising market. Yahoo’s strategic investment mainly consists of its stake in Alibaba group and Yahoo! Japan.
As of today, the investment in Alibaba.com and Yahoo! Japan is worth $10 billion pre-tax, [2] and approximately $7.9 billion after-tax. We estimate that the strategic investments constitute around 30% of the $18.53 Trefis price estimate for Yahoo stock, which is about 10% higher than the current market price.
Yahoo move to tap the booming Chinese online advertising market
Chinese online advertising market grew at a fast rate of 21% in 2009 compared to 2008. [3] According to Analysys International, a Chinese research firm, Alibaba group comes second behind Baidu in terms of market share of revenue the China online advertising market. [4] Alibaba recently overtook Google to become the second ranked player in China. [5] According to the article, Alibaba Group’s market share increased from 7.8% in Q2 2010 to 9.3% in Q3 2010 while Google’s declined from 10.8% to 8.9% during the same period.
Alibaba Group is a China based company, which consists of the following groups: [6]
- Alibaba.com, an eCommerce platform for small business,
- Taobao, China’s largest online retail website,
- Alipay, China’s third party online payment platform
- Alibaba cloud computing, developer of cloud computing services
Yahoo has about a 29% indirect stake in Alibaba.com (PINK:ALBCF), [2] which came out with an IPO in November 2007. [1] Although Alibaba.com’s valuation has not increased much over the last few years, its the other groups like Taobao and Alipay that have grown much faster. [7] If Alibaba Group continues to gain share in the booming Chinese online advertising market, leading to an increase in its valuation, it could directly create upside to our estimate for Yahoo stock. For example, assuming Alibaba’s valuation increases by $5 billion and Yahoo’s stake of 40%, Yahoo’s valuation increases by $2 billion. This scenario could lead to an upside of 8% to our estimate for Yahoo stock.
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Our complete analysis for Yahoo’s stock is here.
Notes:- Information available in Yahoo’s 10-K form [↩] [↩]
- See SeekingAlpha: Q3 2010 earnings conference call transcript [↩] [↩]
- iResearch: Chinese Online advertising market broke the 20 billion Yuan mark in 2009, January 2010 [↩]
- Baidu, Alibaba and Google rank top 3 in online ad market, Analysis International Online, December 2010 [↩]
- Google Trails Alibaba in China Market, Bloomberg Online, Dec 9 2010 [↩]
- Alibaba group company overview [↩]
- Taobao could be worth $10 billion and Alipay could be worth $5 billion, Techcrunch quoting Stifel, Nicolaus & Co., September 2010 [↩]
