Morgan Stanley initiated coverage on Yahoo! Inc. YHOO Thursday with an Overweight rating and $55 price target.
Analysts led by Brian Nowak felt the stock was an an attractive way to purchase Alibaba Group Holding Ltd BABA at 21x 2016 EPS.
Nowak thought BABA was undervalued and saw a tax efficient outcome for the BABA
SpinCo.
The analysts were "bullish on BABA's industry leading position and long-term monetization opportunity" and valued it at $102.30 per share.
The "tax efficiency plus expected BABA price appreciation (we see ~22 percent upside from current levels) makes YHOO's stake in BABA worth ~$38/YHOO share (~70 percent of our $55 PT and ~85 percent of YHOO's current ~$45 share price)," according to Nowak.
Yahoo! Base Case Valuation
With Yahoo's core trading at negative $5 per share based on the assumptions in the note, the analysts remained bearish on the core, however and "improvement or stability" in the core would be "upside" for the stock.
Risks to the analysts call included the "inability for [the] SpinCo to remain tax free, lower than expected BABA long-term value, worse than expected core results, new margindestructive search distro deals, acquisitions."
Yahoo! Inc. closed at $44.47 Thursday, up 0.61 percent.
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