Here's what I wrote back in the day (7/31) to some clients:
YHOO is a buy. Here's a profitable company with a 24% stake in Alibaba, which is going to go public at $168B (avg estimate). Call it $150B. Yahoo has a $37B market cap. They are selling 9% of their 24% stake and assuming that's taxed at 35% (I doubt it will be), that's $8.775B. If the IPO goes off at my conservative estimate and doesn't rally (which it will, but anyway), the other portion of YHOO's stake is worth $22.5B. So with a conservative (or at least middle of the pack) set of assumptions, it values all of YHOO's "other" business stuff at $6B, which generated $1.2B of trailing EPS. So a mature, profitable internet stock that's profitable at a P/E of 5 with IPO upside? Sounds like a good risk/reward. If you fiddle with what Alibaba does post-IPO and think it will be a success, then you can arrive at some really juicy upside calculations.
You can run a similar set of calculations now that we have more data, like the share price of $66-68, and obviously you have to re-update YHOO's market cap. This one is tricky, and I am always looking at the risk/reward, almost as a ratio of upside to downside, as that governs position size. So it's tricky b/c you have to think about what the smart $ is doing, not what you should do now. For example, they all know that they could have owned (and did own) BABA via YHOO. They all knew the same stuff that I came up with (and probably did a better job at it). So whether or not they got pre-ipo shares, I am not sure that's relevant. The other thing is that the market has to absorb a ton of $, which has to come from somewhere. I think that's the key. Here's how I would play it:
-Short amazon. Whether right or wrong, $ will likely flow from AMZN into BABA. Since AMZN has focused on sales growth and not profit, yet BABA is profitable, I think the thesis for owning BABA is stronger and we will see Large Cap Growth managers make the switch. BABA will benefit from that phenomenon where people who haven't visited the website will see what it's about, and with AMZN having had such a run, I think BABA steals some market share.
-Buy call spreads on YHOO (buy the 44's and sell the 45's, which will cost $.28). If the IPO goes bananas, you get paid ~3.3/1. You could back out the BABA shares from YHOO and fiddle with the numbers based on what I wrote above and probably come up with the best vertical call spread to buy, then at least you have some "action" for a speculative investment. I haven't played with the above analysis with the new numbers, so I couldn't tell you what the right strike price is, but I think you get the idea (if you don't understand options, don't bother with any of this).
Me? Well the damage has been done and the easy money has been made. I will prob sell off 1/2 of the YHOO positions for clients on the day of (if things are going well), and just have them hold the rest. No way I am buying a company that's growing at 46% with a forward P/E of 44. I would rather troll for a lower price that I will never get
