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I am still flabbergasted at how Yahoo is listed so low. If Alibaba hits their target, Yahoo's ownership will be worth about $35bil. Yahoo's current market cap i

I am still flabbergasted at how Yahoo is listed so low. If Alibaba hits their target, Yahoo's ownership will be worth about $35bil. Yahoo's current market cap is around $39bil (and is near it's 52week high). That means that the market valued Yahoo at about $4bil as its own company, which seems terribly low for a company that took in $1bil in earnings last call.

cj 12y ago
There's a pretty good Bloomberg article about this: http://www.bloombergview.com/articles/2014-04-17/how-can-yahoo-be-worth-less-than-zero http://www.bloombergview.com/articles/2014-04-17/how-can-yah... Discussion: https://news.ycombinator.com/item?id=7606891 https://news.ycombinator.com/item?id=7606891
adventured 12y ago
That's not how assets on a balance sheet are valued and represented in a market cap. In fact it's the Alibaba, Yahoo Japan, and cash positions that are discounted down from their face value. Not the business of Yahoo (which receives a multiple). Cash is ultimately what the Alibaba position represents. Cash is always discounted, sometimes heavily, on a balance sheet. It would be extremely rare to see a public company receive a $1 to $1 ratio on cash to market cap. Let me give you a simple example of this premise as it would apply to Yahoo. Let's say they have $35 billion in Alibaba, and a $39b market cap. And let's say they have $1.3b in earnings. They liquidate the Alibaba holdings, and disperse all that cash to shareholders. So the $1.3 billion in earnings is now receiving a market capitalization of $4 billion (3 times earnings)? Nope, they would probably trade for 15 to 30 times earnings still (depending). It's the value of the Alibaba holdings that is discounted. There are a lot of easy demonstrations of this in action. Apple is an ideal one. Their cash exploded like a rocket up to $150 billion, their market cap and multiple compressed such that cash was 40% of their market cap (but that's not what actually happened, the cash was heavily discounted).
- refurb 12y ago
  Interesting. What is the reason for discounting cash so heavily? Logically you'd think cash would be the last thing to be discounted.
  - rando289 12y ago
    Not knowing much about it, I'd guess that companies are valued generally not on their assets, but their potential for future profits. Assets like cash are just a small piece of what will determine their future profit. Unless they don't have much prospect for future profit, then the cash would become a bigger deal.
  - adventured 12y ago
    Cash is not a great growth multiplier, and today it yields almost nothing. The core business and its profit generation capabilities are what matters. Think of it like food for a body. It's nice to have plentiful energy availability in the form of food, a surplus of food around the house is typical. However there's only so much you can realistically do with it, and your body has an energy limit / potential limit. This is true about all businesses in any given period of time, they can only do so many things successfully. Cash is a required operational fuel, and sometimes it's useful for acquisitions, but each dollar of cash you possess beyond the bounds of your realistic capabilities or potential (the ability to put that cash to work for the business and yield a sizable return), is worth less and less and less. That's why Amazon has been allowed to keep such a large market cap, despite the fact that for most of their history they had a terrible balance sheet, and very modest cash. If Google had $10 billion in cash instead of $60 billion, what would not happen, is Google wouldn't see a ~12% discount applied to their market cap. It's all about the earnings, the business, the future growth prospects in advertising and mobile, and so on. Investors aren't primarily sitting around wondering what Google might do with the $3 billion dollars they add each quarter - they want to know how mobile search is doing. Microsoft has been a great demonstration of how worthless cash often is to a cash rich business (except as a discharge to investors). They simply can't find anything sane (or permissible) to do with it all, and that has been the case for 15+ years. That's why stocks historically are traded by a multiple of their earnings. That's why companies can have hilariously bad balance sheets, like Comcast or as GM used to, and still have a reasonable market cap.
- ggupta 12y ago
  In the vast majority of cases, investors do value cash on a 1:1 basis. The reasons for not doing so: (1) If the company is burning cash - This is self explanatory. Remember that the opposite is true as well - when arriving at the price target, investors will also give credit for any free cash flow (FCF) that they expect the company to generate over their holding period. (2) If most of the cash is held overseas - Unless the US has a tax repatriation holiday, companies will face a "make-whole" tax bill based on the delta of the tax rate between the US and the foreign domicile. This is a big issue for large-cap tech companies that generate substantial cash overseas, but whose expenses / capital returns policies all use US cash. For example, Cisco has $51bn in cash, of which $46bn is held overseas. Cisco and most other companies facing this issue have publicly stated that they will not repatriate cash unless there is a tax holiday. They are generating enough free cash flow in the US where they have no need to. They could also raise domestic debt based on foreign cash balances to get around the need to repatriate. As a result, most investors do end up giving cash a 1:1 credit even in this scenario. (3) If investors don't trust the management team's use of that cash - Cash is only valuable to equity investors in so far as it can eventually be returned to shareholders through share repurchases or dividends. Companies often get penalized if the management team has a history of using cash in inefficient ways - either investing in non-core / dilutive business adjacencies, or value-destructive acquisitions. Zynga is the perfect example here - the bull thesis on Zynga when it was trading at $2.50 was that the company was trading at cash value. The bears on the other hand felt uncomfortable giving Zynga full value for the cash because the management team had acquired a number of gaming studios (e.g. OMGPOP) that did not provide any long-term contribution and were eventually shut down. Long story short, in most circumstances, you should operate under the assumption that investors are giving a company 1:1 credit for cash. What they're actually discounting is the denominator - the earnings if you're using a P/E multiple, or the EBITDA if you're using an EV / EBITDA multiple. They're betting that the projected earnings power of the company is overly optimistic. That's actually a double whammy - valuation multiples are dependent on growth rates, i.e. higher growth results in a higher multiple. If the denominator falls, the growth rate is lower, and thus the multiple contracts as well. Most retail investors fail to understand that a slight decrease in the denominator actually has a much larger impact on the valuation. The case of Yahoo is a bit unique, but related to #2 above. The market is implying that Yahoo won't be able to liquidate it's Alibaba stake in a tax-efficient manner and will thus end up paying 20-35% taxes. Happy to run you through the full math, but after you account for taxes, you're paying ~5-6x EBITDA for a business growing single digits y/y. Arguably Google is a more tempting investment opportunity - it's trading at roughly the same multiple, but growing double digits y/y.
idlewords 12y ago
Maybe it's Yahoo's recent track record of acquisitions. If people think Mayer is going to burn through most of the money buying companies of dubious value to Yahoo, it makes sense to discount it.
- mrfusion 12y ago
  Yup. I wanted to write an onion headline "Yahoo in talks with Taco Bell to purchase 10 billion tacos with alibaba windfall"
zhte415 12y ago
Having this on the balance sheet as cash could make them an easier take-over target. Only a handful of technology companies have the means and justification for acquiring Yahoo! but with cash on the balance sheet it would be much easier for a smaller company to raise finance (i.e. get a loan which would be paid back very quickly, by releasing the cash back to the financier, opposed what was the case of waiting and waiting for Alibaba to get listed). How fast Yahoo! can see the cash is another matter, as there's some history of bad blood between Alibaba and Yahoo!
badusername 12y ago
The current valuation would mean that Yahoo, as a company, is valued at around 14-18 billion. Note that even though Yahoo's ownership is about $35B, a tax-rate of about 35% is taken into account, even though the eventual tax-rate might be something quite different.

cj 12y ago

There's a pretty good Bloomberg article about this: http://www.bloombergview.com/articles/2014-04-17/how-can-yahoo-be-worth-less-than-zero http://www.bloombergview.com/articles/2014-04-17/how-can-yah... Discussion: https://news.ycombinator.com/item?id=7606891 https://news.ycombinator.com/item?id=7606891

adventured 12y ago

That's not how assets on a balance sheet are valued and represented in a market cap. In fact it's the Alibaba, Yahoo Japan, and cash positions that are discounted down from their face value. Not the business of Yahoo (which receives a multiple). Cash is ultimately what the Alibaba position represents. Cash is always discounted, sometimes heavily, on a balance sheet. It would be extremely rare to see a public company receive a $1 to $1 ratio on cash to market cap. Let me give you a simple example of this premise as it would apply to Yahoo. Let's say they have $35 billion in Alibaba, and a $39b market cap. And let's say they have $1.3b in earnings. They liquidate the Alibaba holdings, and disperse all that cash to shareholders. So the $1.3 billion in earnings is now receiving a market capitalization of $4 billion (3 times earnings)? Nope, they would probably trade for 15 to 30 times earnings still (depending). It's the value of the Alibaba holdings that is discounted. There are a lot of easy demonstrations of this in action. Apple is an ideal one. Their cash exploded like a rocket up to $150 billion, their market cap and multiple compressed such that cash was 40% of their market cap (but that's not what actually happened, the cash was heavily discounted).

refurb 12y ago
Interesting. What is the reason for discounting cash so heavily? Logically you'd think cash would be the last thing to be discounted.
- rando289 12y ago
  Not knowing much about it, I'd guess that companies are valued generally not on their assets, but their potential for future profits. Assets like cash are just a small piece of what will determine their future profit. Unless they don't have much prospect for future profit, then the cash would become a bigger deal.
- adventured 12y ago
  Cash is not a great growth multiplier, and today it yields almost nothing. The core business and its profit generation capabilities are what matters. Think of it like food for a body. It's nice to have plentiful energy availability in the form of food, a surplus of food around the house is typical. However there's only so much you can realistically do with it, and your body has an energy limit / potential limit. This is true about all businesses in any given period of time, they can only do so many things successfully. Cash is a required operational fuel, and sometimes it's useful for acquisitions, but each dollar of cash you possess beyond the bounds of your realistic capabilities or potential (the ability to put that cash to work for the business and yield a sizable return), is worth less and less and less. That's why Amazon has been allowed to keep such a large market cap, despite the fact that for most of their history they had a terrible balance sheet, and very modest cash. If Google had $10 billion in cash instead of $60 billion, what would not happen, is Google wouldn't see a ~12% discount applied to their market cap. It's all about the earnings, the business, the future growth prospects in advertising and mobile, and so on. Investors aren't primarily sitting around wondering what Google might do with the $3 billion dollars they add each quarter - they want to know how mobile search is doing. Microsoft has been a great demonstration of how worthless cash often is to a cash rich business (except as a discharge to investors). They simply can't find anything sane (or permissible) to do with it all, and that has been the case for 15+ years. That's why stocks historically are traded by a multiple of their earnings. That's why companies can have hilariously bad balance sheets, like Comcast or as GM used to, and still have a reasonable market cap.
ggupta 12y ago
In the vast majority of cases, investors do value cash on a 1:1 basis. The reasons for not doing so: (1) If the company is burning cash - This is self explanatory. Remember that the opposite is true as well - when arriving at the price target, investors will also give credit for any free cash flow (FCF) that they expect the company to generate over their holding period. (2) If most of the cash is held overseas - Unless the US has a tax repatriation holiday, companies will face a "make-whole" tax bill based on the delta of the tax rate between the US and the foreign domicile. This is a big issue for large-cap tech companies that generate substantial cash overseas, but whose expenses / capital returns policies all use US cash. For example, Cisco has $51bn in cash, of which $46bn is held overseas. Cisco and most other companies facing this issue have publicly stated that they will not repatriate cash unless there is a tax holiday. They are generating enough free cash flow in the US where they have no need to. They could also raise domestic debt based on foreign cash balances to get around the need to repatriate. As a result, most investors do end up giving cash a 1:1 credit even in this scenario. (3) If investors don't trust the management team's use of that cash - Cash is only valuable to equity investors in so far as it can eventually be returned to shareholders through share repurchases or dividends. Companies often get penalized if the management team has a history of using cash in inefficient ways - either investing in non-core / dilutive business adjacencies, or value-destructive acquisitions. Zynga is the perfect example here - the bull thesis on Zynga when it was trading at $2.50 was that the company was trading at cash value. The bears on the other hand felt uncomfortable giving Zynga full value for the cash because the management team had acquired a number of gaming studios (e.g. OMGPOP) that did not provide any long-term contribution and were eventually shut down. Long story short, in most circumstances, you should operate under the assumption that investors are giving a company 1:1 credit for cash. What they're actually discounting is the denominator - the earnings if you're using a P/E multiple, or the EBITDA if you're using an EV / EBITDA multiple. They're betting that the projected earnings power of the company is overly optimistic. That's actually a double whammy - valuation multiples are dependent on growth rates, i.e. higher growth results in a higher multiple. If the denominator falls, the growth rate is lower, and thus the multiple contracts as well. Most retail investors fail to understand that a slight decrease in the denominator actually has a much larger impact on the valuation. The case of Yahoo is a bit unique, but related to #2 above. The market is implying that Yahoo won't be able to liquidate it's Alibaba stake in a tax-efficient manner and will thus end up paying 20-35% taxes. Happy to run you through the full math, but after you account for taxes, you're paying ~5-6x EBITDA for a business growing single digits y/y. Arguably Google is a more tempting investment opportunity - it's trading at roughly the same multiple, but growing double digits y/y.

idlewords 12y ago

Maybe it's Yahoo's recent track record of acquisitions. If people think Mayer is going to burn through most of the money buying companies of dubious value to Yahoo, it makes sense to discount it.

mrfusion 12y ago
Yup. I wanted to write an onion headline "Yahoo in talks with Taco Bell to purchase 10 billion tacos with alibaba windfall"

zhte415 12y ago

Having this on the balance sheet as cash could make them an easier take-over target. Only a handful of technology companies have the means and justification for acquiring Yahoo! but with cash on the balance sheet it would be much easier for a smaller company to raise finance (i.e. get a loan which would be paid back very quickly, by releasing the cash back to the financier, opposed what was the case of waiting and waiting for Alibaba to get listed). How fast Yahoo! can see the cash is another matter, as there's some history of bad blood between Alibaba and Yahoo!

badusername 12y ago

The current valuation would mean that Yahoo, as a company, is valued at around 14-18 billion. Note that even though Yahoo's ownership is about $35B, a tax-rate of about 35% is taken into account, even though the eventual tax-rate might be something quite different.