Yahoo investors like Alibaba, not so sure about Yahoo

Yahoo’s stock was bouncing up and down – but  mostly down – on Wednesday, as investors struggled to reconcile another tepid earnings report with their excitement over the impending IPO of Alibaba, the booming ecommerce site in which Yahoo owns a 24 percent stake.

After a brief surge on Wednesday morning, Yahoo shares fell below their opening price of $33.92 and stayed there for most of the day.

The problem for Yahoo is that, despite CEO Marissa Mayer’s boast that the company’s websites and mobile apps are seeing increased visitor traffic, the earnings report she issued Tuesday shows that Yahoo’s core advertising business is still struggling.  Display ad  revenue fell again in the third quarter, while search-related ad sales showed a modest increase after subtracting commissions to ad partners.  Yahoo’s overall revenue minus commissions was down 1 percent.

At the same time, Yahoo reported that Alibaba’s business grew 61 percent in the second quarter (Yahoo has been disclosing Alibaba’s numbers for the quarter preceding the period of its own report), as the Chinese company saw revenue of $1.7 billion.

“Alibaba is on fire,” declared analyst Carlos Kirner of Bernstein Research in a note to clients Wednesday. But he added, “At this point, however, we see neither enough upside nor a compelling reason to own Yahoo stock beyond the Alibaba IPO to recommend it.”

Ben Schachter of Macquarie Securities had a somewhat similar reaction in his report on Yahoo’s earnings.  “The user metrics were solid, the revenue growth was not,” he wrote.  He added, “The bottom line is that until clear trends emerge in the (Yahoo) core business, Alibaba will continue to drive the stock.”

Yahoo’s stake in Alibaba could bring the Sunnyvale company as much as $19 billion after taxes, analysts say.  But Yahoo apparently likes Alibaba so much that it announced it has amended an earlier agreement with Alibaba that required Yahoo to sell half its Alibaba shares in the IPO.  Yahoo now has the right to hold on to 60 percent of its stake.

At least seven Wall Street firms raised their price targets for Yahoo on Wednesday, according to Reuters, with most citing Alibaba as the reason.

(Screen shot of Mayer and Yahoo CFO Ken Goldman from Yahoo’s second-quarter earnings report.)




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