3 Reasons Citi Downgraded Yahoo, Set $37 Price Target

Citi’s Mark May downgraded the rating on Yahoo! Inc. YHOO from Buy to Neutral, while raising the price target from $32 to $37.

Stock Up

May mentioned that the stock had appreciated 22 percent since the company reported its earnings on February 2, outperforming the S&P 500 by 1420 bps.

The analyst elaborated that analysis “suggests that the market now more accurately reflects the value creation likely possible through a sale or spin-off of the core business.”

Could Rise Higher

However, May also pointed out that there were some factors that could drive the share price meaningfully higher, such as a situation where Alibaba Group Holding Ltd BABA shares trade higher or if acquirers agree to pay more than the estimated $5,7 billion for core Yahoo!

The stock could also move significantly higher if investors ascribe a lower liquidity discount and tax rate than the combined rate of 32 percent estimated for Yahoo’s stakes in Alibaba and YJ.

On the other hand, the analyst also stated that “given Yahoo!’s history of execution and given our assessment of scenario probabilities, we now view the risk/reward as more evenly balanced.”

3 Reasons For Opinion

May went on to explain that the current stance on the stock was based on three scenarios, including a 30 percent probability of a spin-off of the core business and the stake in Yahoo! Japan, 60 percent probability of a sale of core Yahoo! and 10 percent chances that status quo would be maintained.