Cash From Alibaba Sale Should Be Invested In Mobile And Social

Yahoo! (NASDAQ:YHOO) announced on September 19th that it has finalized a sale of half of its assets in Alibaba Group. ^[1] The company will receive approximately $7.6 billion from the sale; $6.3 billion in cash, around $800 million in preferred shares and $550 million in cash for a technology license agreement. Net cash proceeds after taxes will be approximately $4.3 billion, $3 billion of which will be returned to shareholders.Overall, we think that this is good news for the company as issues surrounding its Alibaba stake had created volatility in the stock. We are also encouraged by the fact that Yahoo! chose to keep around $1 billion of cash for further investments, signaling that it expects growth in its operating segments. This is key, since after we account for the return of cash to shareholders, Yahoo!’s operating divisions will become a greater percentage of the company’s total value. With the additional $1 billion in cash that Marissa Mayer now has on hand, we think that Yahoo! should invest in improving its product mix on the social and mobile front, two segments which are key in driving advertising revenues.

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Mobile growth can attract new users

We think that mobile will be key for Yahoo! as it seeks to attract more users to its platform, especially in the emerging markets. The fact that an ever increasing number of users are accessing the web through their mobile phones makes this segment key if Yahoo! wants to drive growth. For example, according to research firm StatCounter, the percentage of total internet page views on mobile phones was 10.1% in May 2012, almost doubling the 5.8% that it posted for the same period in 2011. The growth was more pronounced in Asia, which saw the proportion grow to 18% in 2012 vs. 8.3% year-over-year. ^[2]

If the company successfully innovates on the mobile front by using the cash from the Alibaba sale, it could attract new users in the emerging markets, especially ones that look to mobile as their primary avenue of internet access. Additionally, it will be able to get a substantial piece of the mobile advertising pie, which will stand at approximately $26.6 billion in 2016 according to research firm eMarketer. ^[3]

Social is key in driving page views

While mobile will be key in attracting new users, we think that social is key in keeping them on Yahoo! properties. This is especially relevant since Yahoo! derives most of its operating value via its display advertising segment which is highly dependent on the number of page views that occur on its websites. Yahoo! has already started to improve its social offerings with products such as a social reader, but we think that the company has ways to go to catch up with competitors Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG). We expect Mayer to focus on the social front as much as the mobile front, since social success is key to driving display ad revenues.

We currently have a $19 price estimate for Yahoo!, which is approximately 20% above the current market price.

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1. Yahoo! Completes First Stage of Alibaba Share Repurchase Agreement Valued at $7.6 Billion, Yahoo! pressroom [↩]
2. Global mobile statistics 2012 Part B: Mobile Web; mobile broadband penetration; 3G/4G subscribers and networks., MobiThinking [↩]
3. US on Track to Become Top Mobile Ad Market, eMarketer [↩]