SunTrust upgraded its rating on Yahoo shares to Buy from Neutral saying the risk/reward is favorable following the recent pullback in shares. The firm sees the potential for 21% upside to its $40 price target.
Yahoo investors were disappointed with Alibaba’s results in January, when year-over-year revenue growth slowed to 51%, compared with 61% in the previous three months and 71% in the period before that. The pace could pick up again, with Alibaba benefiting from an annual one-day shopping festival Nov. 11 that is larger than the two biggest online shopping days in the U.S. combined. The numbers will prelude Alibaba’s highly anticipated IPO, which is expected in the third quarter. The deal could value Alibaba at more than $100 billion and net Yahoo a cash pile in the billions.
Yahoo!'s risk/reward trade-off is rather attractive at this point. "Our analysis indicates that after adjusting for Yahoo!'s ownership of Yahoo! Japan and Alibaba, that investors are essentially getting the core Yahoo! asset for free," said Peck. "Taking the taxed current market value for Yahoo! Japan (which is down ~18% in the last month) and assuming a $150b IPO for Alibaba with a $200b ultimate value for Yahoo!'s stub remaining position accounts for $29 per share for Yahoo. Subtracting out the ~$4b of net cash, an investor is paying -0.2x EBITDA for Yahoo!'s core." Given how limited Yahoo!'s downside seems to be at the moment, it's pretty tough to disagree with SunTrust's upgrade.