Just out from Citigroup:
Yahoo! shares are down meaningfully during the last two trading days due to the decline in BABA shares, even though Yahoo! announced this week the best-case scenario for its shareholders in the form of a tax-free spin-off of its entire equity position in BABA (see our note here). The trading has created an unusual dislocation, in our opinion. Assuming 1) that the BABA stake trades at a 10% discount to BABA as a SpinCo (and, therefore, is worth $33/YHOO share at current BABA levels), and 2) that its 35% equity stake in Yahoo! Japan is valued using a 44% discount to the current market value (i.e., a 38% tax rate plus a 10% liquidity value), then the core Yahoo! business is currently valued at nearly a negative enterprise value of $1bn.
This for a business that generates >$500mn in free cash flow per year and has had stable revenues and margins. Considered another way, if we assume fair value of core Y! is 4x EBITDA and continue to fully discount the YJ stake, we believe BABA would have to drop below ~$74/sh in order for there to be further downside in YHOO shares from here, all else equal. And, we believe BABA shares would need to fall to $63/share for YHOO shares to suffer a 10% or greater decline under this scenario.
Clearly it is time for even more value added by Yahoo's ridiculously overhyped CEO to do what she does best: