It is possible that Alibaba may be uncomfortable with Yahoo’s continued large trendy boutique ownership and find a way, legal or extralegal, to get Yahoo to sell. The IPO failure colored investors’ views of the company and its management, leading them to put the worst possible spin on every action and occurrence at the company. Alibaba’s IPO may seem an obvious catalyst but market corrections don’t always follow the logical path. The tax issue is a nagging problem, but the company seems cognizant of the tax overhang and negotiated with Alibaba to reduce the number of shares that it would have to sell after the IPO. Not only is there a gap between price and value with Yahoo but there is one between price (that the market is attaching to Yahoo) and price (that the market is attaching to Yahoo! Japan and Alibaba) and as a newly minted Yahoo stockholder, I am hoping that one or the other of these gaps will close.
First, if the market prices for Yahoo Japan and Alibaba skyrocket and Yahoo’s price does not, the gap that we highlighted in the last section may get bigger. To address these questions, I am going to draw on some of my earlier posts on Apple and look for a narrative that may explain the market reaction. DryShips Inc. ( DRYS ) – DRYS broke out to the upside on Friday stopping short of the $7.62 low from May 8th. $7.62 is a resistance level to watch going forward. The downside is that Ms. Mayer loses a chance (albeit one with low odds) to go down in history as the CEO who brought Yahoo back from the dead. The stock continued to slide, hitting a low of $385/share in April. In April 2013, I revalued Apple at about $590, after their earnings report, where they surprised markets by announcing both an increased stock buyback and their first debt issuance, well above the stock price of $420 at the time of the announcement. In September 2013, I posted on Apple in the context of separating your love for a company from your assessment of its stock as an investment, and revalued the stock at more than $600/share.
While the price initially lagged my estimate of value (with the under valuation increasing to 21% in September 2011), it surged thereafter closing the gap in July 2012. In September 2012, the stock price ($667) exceeded my value estimate ($639) for the first time during this period and that represented the pricing peak, as momentum shifted dramatically in the weeks after. In the days that followed, I also posted on what Apple could do in response to the pricing collapse and how investors could view and profit from the gap. I rationalized my decision in that post and the next one, by presenting a theme that I have returned to several times since, which is that the pricing of a stock can be very different from its valuation and that when a stock becomes a momentum play, value will take a back seat to other factors. If you are interested in delving through the valuations in detail, I have posted all twelve valuations I have done of Apple since January 2011 at the end of this post.