Why Is Yahoo Valued Less than Zero?

According to several articles I have seen today, notably this Wall Street Journal report, Yahoo's Board of Directors are considering a sale of Yahoo's core Internet business.

For quite some time, Yahoo has been a troubled company. To many people, it doesn't matter. But to those of us who enjoyed it as one of the first major Internet search sites, it is very sad to see.

Marissa Mayer was brought on board to fix the company. Her experience as a product person at Google indicates she was brought in to fix the company, not to sell it in pieces. If the Board is looking to do that, either she came to the conclusion that there was not much to do, or the Board came to that conclusion despite her.

Two analyses from Business Insider (here and here) look at Yahoo and ask the pertinent question - one that I assume Mayer asked inside the company - "what is Yahoo's core business?"

Before addressing that "core" question, I would like to look at the other issues raised by the articles: the oddity of Yahoo's value.

Yahoo owns 15% of Alibaba, whose market cap as of this writing is $206BN, leaving Yahoo's share at $31BN. Yahoo's market cap, on the other hand, is $32BN. Essentially, strip off the Alibaba investment, and Yahoo is worthless... despite having $5.9BN in cash and short-term investments and another $1.6BN in property and equipment (after depreciation and amortization). Take off the $1.2BN in debt, and the company still should be worth at least $6.3BN. Yet it isn't.

The market values Yahoo at negative more than $6BN.


The obvious answer is that the markets expect Yahoo to continue down its current path, burning cash as time goes on and losing the at least $6BN in net assets it actually does own, after accounting for the Alibaba stake. It is fair to assume that all of the rest f its businesses, brands and assets must be worth quite a bit more than $0.

The market expects Yahoo to destroy more than $6BN in value over the foreseeable future.  That is a pretty damnable indictment.

Interestingly, after the report about the Board considering splitting up and selling the businesses, Yahoo shares rose 7%. That could be simply expectation of an increase in value due to bidding, but it equally could be because the market expects, or at least has a glimmer of hope, that Yahoo will unlock value by spinning out businesses that are worth more on their own.

Tomorrow, we will look at those businesses and see the additional value.