6 Reasons Yahoo Shares Offer A More Compelling Risk/Reward

At current levels, shares of Yahoo! Inc. YHOO imply a 30-35 percent discount to the underlying market values for the company’s stakes in Alibaba Group Holding Ltd BABA and Yahoo Japan as well as a $2-$4 billion value for the company itself, Citi’s Mark May said in a report.

The analyst upgraded the rating for the company from Neutral to Buy, while raising the price target from $38 to $43.

Upside To Shares

May noted six factors that create “a more compelling risk/reward” for Yahoo’s shares:

1. Recent credible news reports and management commentary related to the auction process
2. Citi’s valuation analysis, suggesting +15 percent upside potential
3. Visible near-term catalysts
4. Alibaba’s recent positive outlook
5. Alibaba’s agreement to repurchase shares from Softbank
6. Underperformance of Yahoo’s shares since the downgrade in rating

Updated Valuation

“Our updated valuation framework suggests a probability weighted price target of $43/share (15% upside), with an upside case of $46/share (+23%), and a downside case of $35/share (-5%),” May wrote. He enumerated the key elements of the thesis as:

1. The Yahoo business is likely to be sold: All-in purchase price is expected to be at least $5 billion, with net proceeds of at least ~$4 billion.
2. The current implied discount of 30-35 percent of Alibaba and Yahoo Japan stakes will decline to 25 percent in the worst case scenario and to 15 percent in the best case scenario, “as the conglomerate (aka complexity) discount abates.”