So as we all know, Alibaba had an IPO last week, in which many people didn’t manage to buy BABA:US shares at $68 (my posts on it can be found here and here). “But don’t worry,” said the experts (and, embarrassingly, me too), “you can take advantage of that situation by buying Yahoo shares.”
Since the IPO, it’s been tanking (admittedly with a slight recovery in the last few days – but still, before the IPO no one knew that Alibaba shares would break $90 and stay there).
And here’s a comparison with Alibaba since:
So let me put some of that into words.
By that share price, Yahoo is presently valued at $40 billion (ie. it has a market cap of $40 billion).
Put that number on ice, while I point out that Yahoo currently consists mostly of:
- Yahoo itself.
- A stake in Yahoo Japan.
- 384 million Alibaba shares (384 million × $90.57 = $35 billion).
- $7 billion in cash (after paying off some convertible debt, etc).
- Which is equal to $42 billion, assuming that Yahoo and Yahoo Japan are worth nothing.
- Which is $2 billion higher than $40 billion.
- And yet?
Also, Yahoo and a stake in Yahoo Japan are hardly worth negative things. Not when you have companies like Snapchat and Twitter being valued in the billions with zero revenues.
This is the point where I try to say something intelligent – but I’m at a loss.
Because sure, you could say that Yahoo can’t sell its Alibaba shares and/or that there’d have to be a discount if it doubled the number of shares on the market, or something. But even if you did that, you wouldn’t be talking about discounts equal to $2 billion plus the value of Yahoo as a standalone plus the value of the stake in Yahoo Japan.
And anyway, you don’t need those shares to list publicly. You can get bought out by enterprising Private Equity firms, or Bill Icahn, or Alibaba itself.
Given that, I have four possible conclusions:
- Alibaba shares are wildly overvalued.
- Yahoo shares are wildly undervalued.
- Yahoo shareholders know something about Alibaba shares that the new swathes of Alibaba shareholders do not.
- The market is crazy and irrational.
Conclusion 4 probably applies irrespective.
For more interesting observations along this line, read “Alibaba could buy Yahoo for free” by Matt Levine.