Yahoo Inc. shares soared Wednesday on improved income, share buyback plans and the ongoing benefit from its minority stake in the Chinese Internet company Alibaba Group.
THE SPARK: Yahoo reported after the market closed Tuesday that its second-quarter net income improved, but its revenue slipped on weaker ad revenue, highlighting the company's challenges as it loses ground to rivals Google Inc. and Facebook Inc. in the online advertising market that generates most of their revenue.
The company's shares initially fell on the report after the market closed Tuesday, but reversed course after management assured investors that it intends to keep buying back the company's stock.
Investors were also cheered by the company's ongoing benefit from its stake in Alibaba. It was the first time that Yahoo released the full breakout of Alibaba's financial results, which included a 71 percent jump in revenue and nearly three-fold gain in net income in its fiscal first quarter.
THE BIG PICTURE: Yahoo investors were not pleased with the drop in the company's revenue, the first since CEO Marissa Meyer took over.
However, plans to buy back shares and Alibaba details were warmly welcomed. The buyback commitment comes after Yahoo had already spent $3.6 billion buying back about 190 million of its shares since last year. Buybacks can make shareholders' existing holdings more valuable and boost earnings per share.
The stock is also benefiting from Yahoo's ties to Alibaba, a rapidly growing company in which Yahoo invested $1 billion eight years ago in exchange for 40 percent. The company sold part of its holdings in the company back to Alibaba last year, but still owns a 24 percent stake that is expected to bring in another $10 billion to $20 billion during the next few years, during which time Alibaba is expected to go public.
Yahoo made more money from its investments in Alibaba and Yahoo Japan during the second quarter than it did from its U.S. operations. That's the second straight quarter that has occurred.
THE ANALYSIS: Stifel analyst Jordan Rohan said Yahoo's gains were due largely to Alibaba.
Rohan said in a research note that the company's core business continues to languish, but that the value of Yahoo's stake in Alibaba more than offsets concerns about the value of its core business. He also noted that the share buyback plans were good news, particularly given its recent spending on acquisitions such as Tumblr.
SHARE ACTION: Yahoo's shares jumped more than 9 percent to $29.36 by late afternoon, far outpacing market gains. Its stock hit $29.73 earlier in the day, its highest point in more than five years.