Why Yahoo Stock Is Flopping After Record Alibaba IPO

Yahoo (Nasdaq: YHOO) made a ton of money from last week’s record Alibaba IPO. So Yahoo shares must be skyrocketing, right? Wrong.

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Yahoo shares have tanked since Alibaba went public last Friday. The stock is down 8.8% in less than two trading sessions. That’s a distinct departure from what most experts thought would happen to Yahoo after the company cashed in on the Alibaba IPO.

Yahoo sold 22% of its Alibaba stake last Thursday, earning $7.6 billion — $4.3 billion after fees and taxes – off Alibaba’s record $25 billion IPO. What’s more, Yahoo CEO Marissa Mayer reportedly vowed to return $3 billion of the company’s Alibaba proceeds to shareholders in the form of a stock buyback. Seemingly, all of those factors should have added up to a major return for Yahoo.

Instead, the stock has gone the other way.

Why has Yahoo flopped so miserably in the wake of the Alibaba IPO? One theory is that the Alibaba bump was already priced into Yahoo’s stock. After all, Yahoo shares were up 23% from mid-June through Thursday’s close. It was the only real way for U.S. investors to tap into the excitement surrounding Alibaba before the company went public.

That bring me to the second theory as to why Yahoo shares are tanking. Now that Alibaba is on the market, it has become essentially redundant to own Yahoo. It’s no longer necessary to own Yahoo as a proxy for Alibaba now that you can actually own Alibaba.

As Dan Niles of the AlphaOne Capital Partners investment firm told The Wall Street Journal, “I got everything I could’ve possibly wanted out of Yahoo.”

Now that Yahoo’s usefulness as an Alibaba play has apparently run its course, the people who own the stock are the ones who like Yahoo based on its own merits. Right now, those merits don’t look great.

Earnings declined 18.6% year over year last quarter. Sales were down 4.5%. Earnings per share are expected to decline 8.5% this year and another 7.2% in 2015. Despite that projected drop-off, the stock still trades at a frothy 30 times next year’s earnings.

So when you look at Yahoo without the rose-colored Alibaba glasses, the stock suddenly doesn’t look so great. That, more than anything, is perhaps why the stock is suddenly tanking.

Unfortunately for Yahoo, the Alibaba rally is over.

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Published by Wyatt Investment Research at