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How Is Yahoo So Worthless?

Yahoo is huge. It is the fourth-biggest Internet domain in the United States. It is the fourth-biggest seller of online ads in the country. It is the most popular destination for fantasy sports, controls one the most-trafficked home pages in news, and owns the eighth-most popular email client. In the last three months, it collected more than $1 billion in revenue. It's very rich.

It's also totally worthless.

Technically, it's worse than worthless. Worthless means without worth. Worthless means $0.00. But Yahoo's core business—mostly search and display advertising—is worth more like negative-$10 billion, according to Bloomberg View's Matthew C. Klein.

The math: Yahoo's total market cap is $37 billion. Its 24 percent stake in Alibaba, the eBay of China, is worth an estimated $37 billion (Alibaba hasn't IPO'd yet, so this figure will vary), and its 35 percent stake in Yahoo Japan is worth about $10 billion. That means its core business is valued around negative-$10 billion.

It also suggests, as Klein points out, that Yahoo’s core ad-sale business has lost $12 billion in value since Marissa Mayer took over as CEO.

How is this possible? Yahoo is a profitable company. How could those profits be worth less-than-zero to shareholders?

One possibility is that investors are discounting Yahoo's stake in Alibaba and Yahoo Japan by a lot, because the government would heavily tax whatever value the company would try to pass along to shareholders after selling its shares. But even if Yahoo sold its shares in Alibaba and Yahoo Japan and took the tax hit, the remaining profitable company—call it Core Yahoo—would have to trade above $0.00. You can't have a public company trade at a negative-$10 billion valuation. And Yahoo isn't "worthless" by at least one very important measure: Its ad division is profitable!

Matthew Levine calls this paradox the "conglomerate discount." Core Yahoo might be valued at less-than-zilch now that it's a part of the conglomerate bundle called Yahoo Inc. But as an independent company, Core Yahoo's value would trade at a higher price. "Core Yahoo is worth less than zero because it's an arithmetic residue of taking a bunch of businesses with very public price tags on them and applying a conglomerate discount," Levine writes.

Yahoo's shareholders, upon gaining a full appreciation that they own a profitable ad business that the market is valuing at a deliriously low price, will perhaps start screaming even louder for the company to sell its holdings. Even a Yahoo Inc worth $0.01 would mean unlocking more than $10 billion in value.

Beyond the finances, Yahoo's big picture is that digital advertising remains a pretty horrible business, where massive audience translates into pennies-worth of value (at best!). The future of our eyes and ears is digital, but the online world looks to be dominated by two non-Yahoo companies: Facebook and Google. Yahoo doesn't have social scale and it doesn't control search. Instead, it merely has massive digital attention, something so cheap that even its profits are easily ignored.

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