Alibaba filed a revised F-1 showing first-quarter results that disappointed many on Wall Street ahead of its highly anticipated IPO later this year. Yahoo (NASDAQ:YHOO) shares fell 5.7 percent as it reacted to the bad news, which brings up the question if we’re looking at a scenario similar to Sina (NASDAQ:SINA) performance prior to the Weibo (NASDAQ:WB) IPO.
What happened to Alibaba?
Let’s get one thing straight: Alibaba is still growing fast. In the company’s quarter ending March 31, the Chinese e-commerce giant reported gross merchandise volume of $69.1 billion and revenue of $1.93 billion, which represented year-over-year growth of 46 percent and 39 percent, respectively.
The problem is that Alibaba finished its fiscal year ending March 31 with total revenue growth of 52 percent, representing a fairly significant slowdown to end its fiscal year. As a result, growth concerns are now starting to rise, and with an IPO just a couple of months away, it couldn’t be at a worse time.
What does this mean for Yahoo?
Alibaba ended its year with revenue of $8.45 billion and net income of $4.44 billion. In the final three months of 2013 — Alibaba’s fiscal third quarter — it saw year-over-year growth of 66 percent, reflecting an acceleration of growth. Therefore, talks have been particularly bullish ahead of its August 8 IPO, with a valuation north of $150 billion and up to $200 billion.
So, how does this news affect Yahoo? The company owns a 24 percent stake in Alibaba, and depending on its valuation, will dictate how much capital Yahoo returns from the investment.
|Alibaba valuation||Yahoo’s pre-tax stake||Yahoo’s net cash minus 35 percent tax rate|
|$100 billion||$24 billion||$15.6 billion|
|$150 billion||$36 billion||$23.4 billion|
|$200 billion||$48 billion||$31.2 billion|
Clearly, $15.6 billion to $31.2 billion is a wide range, although still a nice haul for Yahoo. But the problem is that Yahoo will lose about half its operating income once Alibaba goes public due to equity interest that it will no longer receive. Hence, the valuation of Alibaba will play a large role in how shares of Yahoo trade in the immediate future.
Why is Sina relevant?
Unfortunately, every rumor and performance metric will impact the eventual valuation of Alibaba ahead of its IPO and the amount investors are willing to pay. A perfect example is what happened to Sina ahead of Weibo’s IPO.
Weibo IPO estimates were bullish in the months prior, with some analysts projecting an $8 billion valuation. However, concerns of slowing daily active user growth and a report that 5 percent of its users created 94 percent of the content prior to the IPO negatively affected its valuation.
As a result, Weibo priced its IPO with a market capitalization of just $3.6 billion, and shares of Sina lost 40 percent of their valuation from the start of 2014 until the IPO. The reason was because Sina owned 78 percent of Weibo. Therefore, despite the fact that Sina’s stake was worth more than its entire company, investors still sold on the lower expectations for Weibo.
In retrospect, Yahoo could very well be the next Sina if Wall Street turns bearish on Alibaba prior to its IPO. There is a large range in valuing Alibaba, and this end result should be a direct reflection of Yahoo’s stock. Given what we saw with Sina and the recent news surrounding Alibaba’s first quarter, it looks quite risky to own Yahoo right now.