40% Interest In Alibaba (Hong Kong: 1688) Represents $4 Per Yahoo (YHOO) Share According To This Valuation By Lou Kerner Of Wedbush, The First Social Media Analyst On Wall Street
December 11, 2010 - The Wall Street Transcript has just published Internet Services Report offering a timely review of the Internet Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Lou Kerner joined Wedbush Securities in June 2010, where he is currently Wall Street's first Social Media Analyst and a frequent guest on CNBC and Bloomberg Television. Previously, Mr. Kerner was the Co-Founder of SecondShares.com, a blog providing news, commentary and Wall Street-style research on the companies driving the social media revolution. Concurrently, he was President of WildSites, a leader in domain parking.
Prior to that, Mr. Kerner acquired and was President of Bolt.com, a leading social network. He also was the first employee and CEO of The .tv Corporation, an idea lab company licensed to commercialize the top level domain (.tv) of the tiny island nation of Tuvalu. Mr. Kerner has a B.A. from UCLA and an MBA from The Stanford Graduate School of Business.
TWST: Do you believe the management teams of Internet media and e-commerce companies have a good understanding of the issue? What are they doing to get into the social media game or reduce negative impact on their companies?
Mr. Kerner: Certainly everybody is integrating with Facebook and deploying the Facebook Connect button on their Web sites, even MySpace, and they all want access to the information available in the social graph. Microsoft's (MSFT) Bing, with its partnership with Facebook, is already leveraging the "like" button information into its search results, and so that's a good example of how the social graph is being leveraged for search today. We also see a lot of other Web sites, like Urban Outfitters (URBN) or Levi's, that let you search on their sites through what people have liked or through what your friends have liked.
TWST: You have an "underperform" rating on Yahoo! Would you tell us some of the key risks and challenges for the company right now?
Mr. Kerner: To the degree Yahoo! (YHOO) is going to be driving the majority of its revenue going forward from display advertising, I think that they are going to benefit from the increased migration of offline advertising to online. But the question is to the degree that their audience isn't growing, they are at risk to lose share of the online advertising share that they currently have.
TWST: Is there anything you think they have in the works that could mitigate that or turn it around?
Mr. Kerner: They have some properties that have performed well. Most notably Shine, which is a women's property that they own. Yahoo! Answers, which is now their second biggest property after Yahoo! Mail, is still growing. Yahoo! Sports is also doing well. So they do have a number of properties that are growing the visitors and the visits per visitor; those are two of the metrics that we track. But other properties like Mail are suffering both from strong competition from the likes of Gmail, as well as from Facebook, as users are using that platform to communicate things they used to use Yahoo! Mail for. So they are using e-mail less.
To the degree that people are getting their news from social media, that's impacting traffic to Yahoo! News. But Yahoo! recognizes the opportunity in social media and has a number of initiatives underway, including the Yahoo! Contributor Network, which is going to leverage the rise of citizen journalism. They have a partnership with Zynga to leverage the growth in social gaming. And they just announced Local Offers, which aggregates the offers from a number of deal sites like Groupon. So Yahoo! has a lot in the works that could help turn things around.
TWST: What are your thoughts on the impact of people increasingly using smartphones for Internet and e-mail, where you may not see advertising?
Mr. Kerner: The only secular trend larger than social media is mobile. Mobile search is going to be huge. We think location is going to be a large advertising medium. Only about 4% of people use location-based services today, but we think over time that number is going to grow meaningfully. So to the degree smartphones help us stay even more connected, that creates huge opportunities for Yahoo!
TWST: You had increased your price target for Yahoo! based on your improved valuation of Alibaba's assets. Would you tell us more about that?
Mr. Kerner: China is the world's largest Internet market, and it's growing rapidly. Yahoo! has a 40% interest in Alibaba (1688), whose assets include Taobao, the eBay (EBAY) of China, and Alipay, the PayPal of China, and Koubei, the Craigslist of China, and publicly-traded Alibaba.com, the leading e-commerce platform for Chinese exporters.
It's a tremendously valuable group of assets, but it's also challenging to value, as the majority of the assets are private. We looked at public Chinese comps and took a 35% private market discount to arrive at our value of about 4 per Yahoo! share. We believe there is significant upside to that value over time, but we also believe unlocking that value is going to be difficult in the near term, given they're private, and Yahoo! has a low tax basis, so they have some work to do if they want to maximize value tax efficiently.
The relationship is a little bit rocky now between Alibaba and Yahoo!, but Alibaba represents a great opportunity for Yahoo! to participate in the upside of the China market.
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