Yahoo earnings will be released this afternoon (Tuesday). But for all intents and purposes, Yahoo earnings are becoming increasingly irrelevant.
Yahoo! Inc. (Nasdaq: YHOO) stock derives almost all its value from cash holdings, its 15% stake in Alibaba, and its 2 billion shares in Yahoo! Japan. When all that is accounted for, Yahoo's core business - which boils down to an identity crisis-stricken seller of ad space in a market that has long since passed it by - is not only worthless, but a net negative.
In other words, the value of Yahoo stock is being driven down by fact that Yahoo's core business is attached to its much more lucrative cash and stock holdings.
All those holdings, based on yesterday's closing prices and exchange rates, total in at $46.8 billion. Yahoo's market cap is $37.1 billion. That means the market values Yahoo's core business at negative $9.7 billion.
To break that down even more, the stake in Alibaba Group Holding Ltd. (NYSE: BABA) accounts for $33.78 of yesterday's closing Yahoo stock price of $39.54. Yahoo! Japan accounts for $8.75. Cash holdings account for $7.36.
And Yahoo's core business: negative $10.35.
Now, obviously Yahoo's core business is not worth negative $10.53 by any true valuation metrics. It does have some value. And if it was worth $0, that is, if it was just worthless and not a net negative, then the Yahoo stock price would be $49.89.
Yahoo stock would be undervalued by 26%. But that's hardly the case.
And Yahoo earnings will likely reinforce this...
What to Expect from Yahoo Earnings
On the earnings call this afternoon, Yahoo CEO Marissa Mayer is going to talk about how promising the growth of Yahoo's core business is. She's going to mention mobile and native ads, as if Yahoo is the pioneer and innovator in either.
She's probably going to hold out Yahoo! Fantasy as an example of Yahoo's top-notch content.
All of this is going to leave shareholders unenthused.
How is Yahoo going to make selling ads against its content in mobile any more attractive and lucrative than its failing desktop ads? And with Yahoo! Fantasy, isn't that just one of many properties Yahoo is going to sell ads against? It's hard to see that driving outstanding sales growth.
And that's why Yahoo earnings are going to serve little purpose from here on out...
The reason the market values Yahoo's core business in the red is because the market isn't trading Yahoo stock with any mind of its core business. It's trading on news of its holdings.
Shareholders will be listening closely as to whether Yahoo is holding to its pledge of spinning off its Alibaba stake in Q4 2015.
They'll also be wondering if, and when, Yahoo has plans to spin off Yahoo! Japan and monetize that.
Shareholders are more concerned with seeing Yahoo gut itself, harvest the cash, and return it to shareholders through buybacks.
And as long as Yahoo earnings don't reveal plans to do that - which they obviously won't - the dial is not going to move on any developments in Yahoo's core business that Mayer tries to flaunt.
Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.
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