Why Alibaba Is Key To Yahoo Amid Japan Exit Rumors

Yahoo (NASDAQ: YHOO) is said to be in talks to sell its 35 percent stake in Yahoo Japan. The divestment, which could generate as much as $8 billion, could give Yahoo the necessary cash infusion in its fight against arch rival Google and Facebook.

Jefferies analyst Youssef Squali said Yahoo appears to be negotiating a way to monetize its 35 percent stake in Yahoo Japan tax-efficiently.

We value YHOO's stake in Yahoo Japan at about $8 billion (pre-tax), and believe progress in unlocking this value would help drive YHOO shares higher, Squali wrote in a note to clients.

In this context, Yahoo's stake in China's Alibaba group assumes signifance as if Yahoo decides to divest its Japanese assets, then it might look to monetize its assets in China as well. In China, Yahoo owns about 40 percent of the Internet company, Alibaba Group, which owns sites such as Alibaba.com, Taobao.com & Alipay.

Alibaba.com is an ecommerce firm, while Taobao.com is an online retail marketplace and Alipay is a third-party online payment platform.

We believe that any monetization improvement attempts for Yahoo Japan can give some boost to Yahoo! Inc. However, in our view, the bigger upside is in Yahoo!'s 40% investment in the private assets of Alibaba Group i.e. Taobao & Alipay, Caris analyst Sandeep Aggarwal wrote in a note to clients.

Aggarwal, who has a buy' rating and price target of $21 on Yahoo stock, said the Street is grossly under-estimating the gross merchandise value (GMV) run rate and value of Taobao & Alipay.

GMV is the total value of merchandise sold over a given period of time through a customer to customer exhange site. It is a measure of the growth of the business, or use of the site to sell merchandise owned by others. GMV is one the performance yardstick of an e-commerce site as the revenue of the business will be a function of gross merchandise sold and fees charged.

Aggarwal expects Taobao/Alipay to generate in excess of $50 billion in GMV in 2011 and can be the largest E-Commerce company globally in terms of GMV and number of active registered users by 2013.

The analyst predicts that China E-Commerce market will reach $60 billion to $70 billion by the end of 2011 and Taobao has anywhere between 70 percent and 80 percent market share, translating into $42 billion to $56 billion in GMV for Taobao.

With roughly 1.5 percent take rate, net revenue can be $630 million to $840 milion, the analyst added. Take rate is nothing but the amount a user pays to the website for taking up a particular service or offer. Take rate is used to measure newsletter subscriptions, downloadable materials such as ebooks and RSS subscriptions.

We believe that Taobao/Alipay can grow top line at 60 percent CAGR and bottom line at 100 percent to 120 percent CAGR for the next 3-4 years because of operating leverage but more importantly because of improving take rates, said Aggarwal, who added that both EBay (NASDAQ: EBAY) and Amazon (NASDAQ: AMZN) are trading at much higher multiple due to higher take rate but lower growth rates.

If we apply 0.5x to 0.7x Price to GMV on 2011 mid-point GMV estimate of $50 billion, we reach a minimum of $25 billion valuation for Taobao/Alipay, the analyst said.